If you’re saving up to buy a home, it can get frustrating. You don’t always make your savings goal each month. You may find yourself diverting what would have gone into savings to pay for car repairs or some other unexpected expense. You may think, At this rate of saving, I won’t own a home for years!
The good news is, your down payment does not have to come only from personal savings. It can come from a lot of different sources. The only caveat is that all sources have to be documented, and they all have to be approved, depending on the type of home loan you’re getting.
Most loans will allow for gifts from family members. But believe it or not, there is a definition of what a “family member” is. Thankfully, it’s pretty much everybody you would expect: Fannie Mae says it’s any person related to you “by blood, marriage, adoption, or legal guardianship; or a fiancé, fiancée, or domestic partner.”
You may also use secured funds for all or a portion of your down payment. This refers to borrowing money against an asset — a collateral loan. Examples are a secured loan from your 401k or borrowing money from another house or property that you already own.
You could even take a collateral loan from your car. If you have a car that’s worth $20,000 that you own outright (you don’t owe anything on it), you could get a car loan against it and use those funds as down payment. The only thing to keep in mind is your lender would have to count that debt in your debt-to-income ratio.
You may use the proceeds from the sale of an asset, as long as you can prove that you own the asset. (Keep all of the paperwork!)
With any of these funding sources, the thing to remember is that everything’s got to be traceable. You must have a document trail from the sale of any item or the withdrawal of any funds.
It may surprise you, but you can’t just plunk down a pile of cash you’ve been holding in a vault for your down payment. Why? It’s untraceable.
The other major unacceptable category of money is unsecured debt, for which you have no collateral to put up. For this reason advances from credit cards, loans from credit cards, and loans from family members or friends cannot be used for your down payment. (Remember that you can use a gift from a family member, which does not have to be repaid.)
One way to remember all of this is that acceptable sources usually do not alter your net worth. If you pull money out of your 401k and turn it into cash, your net worth did not change. But if you pull money off your credit card, you just went deeper into debt.
If you have questions about down payments or any other aspect of home financing, drop by benchenault.com, connect with us on social media, or give us a call at (205) 986–4220. Every member of my team is happy to help.
— Ben Chenault,
Certified Mortgage Planner
MortgageBanc / Fairway Nmls# 2289
Fairway Independent Mortgage Corporation is not a credit counseling agency and will not provide credit advice. Please consult a professional regarding your specific credit situation.
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