Insider Tips
Creative Downpayment 101
By Dan Smith

Creative Down Payment 101

Let’s say that you are ready to buy a home, but despite you best efforts, you are short of funds needed for a down payment and closing costs. Unless you have a full 20% down to work with, most lenders will require you to have 5% (of the purchase price) of your own money invested into the transaction. With house prices where they are, this can be a major hurdle for many buyers. So this month I want to talk about how you can work within the system creatively to get what you want.

First, many people overlook their 401K from work. Most employers’ 401K programs have a caveat in their plan for purchasing a primary residence. Generally you can borrower the money from yourself at favorable rates and terms, or take what is called a “hardship” withdrawal for the purchase of a home. Be careful though. A hardship withdrawal will have tax consequences that need to be understood. However, after reviewing those consequences with your employer, you may find that the tax benefit of home ownership outweighs those consequences.

There is also a way you can still use a gift, even though the mortgage company told you that it would require 5% of your own money. Keep in mind that the mortgage company will only look back 60 days when it comes to your bank accounts. So in preparation for a home purchase, you may want to deposit any gift funds you are counting on early in the process. After 60 days, those funds are effectively considered your own and will not trigger the 5% restriction. This is also true for unsecured borrowed funds. While it usually isn’t a great idea to borrow on credit cards (or the like) prior to a home purchase, your circumstances may permit you to deposit those borrowed funds for the same 60 day period. The trick here is that new debt will show on your credit report, so you will want to know in advance that the extra payments won’t prevent you from qualifying, or that your credit score won’t be adversely affected. It is important to talk with a loan officer before attempting this maneuver and plan appropriately.

Secured borrowing for a down payment has always been permitted. So a car that is free and clear (or any other acceptable collateral) may be just the ticket. But just as with the unsecured scenario above, you will want to speak to a loan officer first before attempting this.

Finally over the last year and a half, there has been a proliferation of 100% financing programs available at most mortgage companies. Each one seems to have its own set of quirks and potential pitfalls. I recommend shopping with a company that offers all or most of them. That way you will get advice that is unbiased about the idiosyncrasies of each, which would allow you to make the best decision for you and your family.

If you think you need a little creativity or just want to discuss the best mortgage for your situation, consult Dan Smith. Feel free to call him at 303-674-2205 and make an appointment today!


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