Sources of down payments

Some people use their 401K money for a down payment. Normally, when someone takes money out of their 401K, the government imposes a 10% penalty for early withdrawal.

However, when it's used by a first-time homebuyer as a down payment, the government does not penalize the borrower for this transaction. This is one of the exceptions.

Another option for a down payment is to get a Gift from a relative. The relative must be in your immediate family. Often when all or part of your down payment is in the form of a gift the lender will have some additional requirements. The lender will ask for a gift letter, which states the relationship of the person giving you the gift and it states that it is not a loan. The lender may also "source" the funds, meaning they ask for documentation to show where the money is coming from. They may also "season" the funds, meaning they would need documentation of how long the funds have been available.

There are also many private and government down payment assistance programs available to help buyers. These are usually in the form of a grant and do not need to be paid back.

Some people use the proceeds from the sale of a previous home to fund their down payment for a new home. If you have recently sold your home and deposited the proceeds into a checking or savings account, your new lender will probably want to verify the source of those funds. A common way to prove the source of the funds is by providing your mortgage broker with the HUD1 settlement statement you were provided with at the closing of the sale of your last home.

Most homes are bought with 0% down, so you would only need money for closing costs. These loans can be a single loan for 100% of the purchase price or 2 loans, one for 80% and the other for 20% of the purchase price.

If you choose to use your own money for a down payment, it will usually have to be seasoned for 60 days.

There are some lenders that now do not require any sourcing or seasoning of funds. This can help many people out when purhcasing a home.

If you choose to use money from a 401k account or another retirement account for a down payment when buying a home find out if you are able to take a loan out on this money instead of actually withdrawing the money from the account. By taking a loan out on the money you will not have to worry about paying taxes on the money from your retirement account and you will not have to deal with any possibility of penalties for early withdrawal. You obviously will have to pay this money back, but you are simply paying the money back to yourself (to your retirement account). Many times you will be able to determine how much you would like to pay and for how long in order to pay this money back and you will also pay yourself interest back on the money as well. This money usually can be automatically deducted from your pay-checks as well for convenience. Consult your retirement account manager or holding company to find out if you may be eligible to take out a loan on this money versus early withdrawal.

A gift of equity can also be another form of down payment. In a gift of equity, a family member can gift a portion of the equity of the house over to the borrower to be used as a form of down payment.

» DISCLAIMER: The information contained in this article on 'Sources of down payments' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.