May 27, 2014 by Leave a comment

The days of lenders granting mortgage loans without also requiring borrowers to come up with a down payment are over. Even home buyers relying on FHA-insured loans will have to come up with a down payment of at least 3.5 percent of a home’s purchase price. Most conventional lenders require down payments of at least 5 percent.

Coming up with this money can prove challenging: A 5 percent down payment on a home with a purchase price of $250,000 comes to $12,500, a large chunk of money.

Unfortunately, lenders won’t allow you to take out a traditional loan to use for your down payment funds. There is an exception, though: Most lenders will allow you to borrow from your 401(k) retirement fund to cover the costs of a down payment. Doing this, though, might prove challenging.

First, not all employers allow their workers to borrow from their 401(k) funds. You’ll have to check with your company to make sure that this is allowed. Secondly, there are usually limits to how much you can borrow. This, too, varies by company, but many employers allow their workers to borrow only up to half of what they have saved in their 401(k) accounts, often up to a maximum amount of $50,000.

You’ll also need to consider the tax implications of borrowing from a 401(k) plan. As long as you repay the loan you won’t have to pay taxes on the money you borrowed. However, any interest you pay on a 401(k) loan is not tax-deductible.

Finally, taking money from your 401(k) account is generally not considered a good financial move. You want to continually grow this account, not take money out of it. Also, if you leave your company before repaying the loan, you’ll have to pay back the entire amount you owe in one lump sum.

If you’re struggling to come up with the money you need for a down payment, you can seek out a gift from family members. Mortgage lenders allow you to use gift funds to cover down payments, as long as the funds are actually gifts and not loans that you have to repay. You’ll have to provide a gift letter from the relatives providing you the gift. This letter must state that the funds are a gift that you won’t have to pay back.

You can also shop around. If you have a strong credit score and a low amount of debt, you might be able to find a mortgage lender that requires a lower down payment.

pmerryman@totalmortgage.com'

Patrick Merryman is a Siena College Graduate that has been writing on Real Estate for over two years. Patrick writes on topics ranging from mortgage projections to green living for numerous blogs.


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