Coming Up with a Down Payment for a New House

Mortgage News from Quicken Loans

Buying a home is no longer as difficult as it once was, in part because lenders have relaxed their requirements on home buyers putting down 20 percent of the home's purchase price. That means you don't have to wait as long to buy a house and that's a good thing, considering the current market heavily favors the buyer.

They've also relaxed the requirements on where the money can come from, provided you can properly and adequately document its source. Money for your down payment may come from any of the following sources:

Checking, Savings, or Money Market Account

If you already have the money available in your checking, savings or money market account, lenders will deem you a less risky borrower. The money is considered liquid funds--easily and quickly accessible. It demonstrates that you are financially stable enough to handle paying back the mortgage loan. Any additional assets that you are able to document for the lender will prove further stability in the case you have a financial emergency and need to draw upon those assets to cover your mortgage payment.

Stocks, Bonds, or Mutual Funds

Selling stocks, bonds or mutual funds to come up with the money for a down payment is an acceptable source. But you will need to show all documentation relating to the sale of those stocks, bonds and/or mutual funds. Also keep a deposit receipt if you deposited the funds into your checking or savings account.

Gifts

You may receive a monetary gift from family members to make the down payment on a new house. This would include your parents, siblings, grandparents, and aunts and uncles. You will need to fill out a "gift letter" provided by your lender that states how you are related to the person giving you the down payment gift, the amount of the gift, and possibly the source where the person got the money for the gift and is signed by you and the gift-giver.

Retirement Accounts

Having a retirement account such as a 401k is another way to prove your financial stability and that you have the ability to save money. If you borrow against your 401k for a down payment, it may be counted by the lender as an additional debt and be added into debt-to-income ratio. This may affect how much of a loan you qualify for. If you cash out part of your 401k, you may have to pay tax penalties. Be sure you're aware of everything involved in using your retirement account for a down payment.

Sale of Personal Property

You can use the profits from the sale of personal property (such as a car or other valuable items) toward a down payment. You need to have a paper trail to prove ownership, sale and transfer of ownership of the item. Ask your mortgage banker what type of documentation you'll need for whatever you'll be selling. Make sure you are paid with something other than cash. A check might be wisest.

Employer Assistance

Some employers will provide assistance to employees when looking for housing because if fosters loyalty toward the company and because employees with a house are less likely to jump around from job to job. Make sure you have copies of all the paperwork to show your lender.

Secured Loans

Usually, you aren't allowed to borrow money for a down payment. But it is acceptable in a few cases, but it must be secured by an asset, such as another property or even a car (as long as you owned the car free and clear). For instance, you might get an equity line of credit if you're planning on renting your old house or if you haven't yet put your current home on the market and want to start looking for a new home. That way, you could make a non-contingent offer on the new house.

Credit cards are considered unsecured loans since you can't lose your house if you don't pay your bills. Therefore, you can't use a cash advance from a credit card for a down payment.

Important Tips to Remember:

  • You can also look into getting a higher loan-to-value mortgage. Some lenders have zero-down programs that finance 100 percent of the home's purchase price; some offer programs for even higher to cover closing costs. You could also look into getting a "piggyback" which is a first mortgage for 80 percent of the home's purchase price and a second for the other 20 percent.
  • Be aware that if you borrow more than 80 percent of the home's purchase price, you'll likely pay PMI. When you've gained 20 percent equity in the house, call your lender to cancel it.
  • You can keep your monthly mortgage payment low by getting an interest-only mortgage that allows you to pay only the interest if you want, but also as much principal as you like.
  • To keep costs down, try to find a lender that doesn't charge pre-payment penalties, or fees for paying off your mortgage early.

There are several ways to get money for a down payment on a house. Lenders want your business and want to help you get into a home; thus, they allow smaller down payments that come from less-restricted sources. Be sure you check with a reputable mortgage banker who can answer your questions knowledgeably and can tell you exactly what documentation you'll need to provide.

This article is reprinted by permission from Quicken Loans © 2006 Quicken Loans Inc. All rights reserved.