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    Sources of Down Payment for Buying a Home

    When buying a home, a common question that many people ask is, “Where can I get the money for my down payment?” You might be surprised at how many different sources you can use, so I asked our #1 lender, Josh Chrans to write this article for me. Josh is a fantastic lender and he’s been helping my clients for over 15 years. If you have any questions about getting a home loan, I invite you to give Josh a call at  (816) 309-1983 or visit his website at www.lenderjosh.com

    1.     Money in the bank – if you have the funds for your down payment in your checking or savings account, and those funds have been there for 60 days or more, you are good to go. If the down payment money was deposited within the last 60 days, we will need to document that those funds came from an “acceptable” source. Unacceptable sources of down payment funds include unsecured borrowed funds, actual cash deposits, credit card advances, and a loan from a friend or family member.

    2.     Money in a retirement account – this depends on your age. If you are not yet of retirement age, you may be able to arrange a loan against your employer-sponsored retirement account (usually a 401K or a 403B). Although generally you are not allowed to borrow money for your down payment – as long as you borrow if from yourself, that is acceptable. 401K loans often have favorable terms and minimal costs and can be repaid in full at any time. Since these are loans, there are typically no withdrawal penalties or income taxes charged. If you ARE of retirement age, you may be able to just take a distribution from your retirement account. Consult with a tax advisor first though, as there will likely be income tax charged on a distribution.

    3.     Money in your current home’s equity – this is split into two categories. The first is “net equity,” which is the amount of money you “net” from your sale after closing. This is relevant if you plan to close on the sale before or on the same day you close on your new purchase. The second category is if you plan to close on your new purchase BEFORE closing on your sale (non-contingent). It is then acceptable to use a mortgage or home equity loan on your current home to fund the down payment on the new home, since you are essentially “borrowing from yourself” here too. This can cause timing issues though if this process isn’t started before going under contract to buy a home.

    4.     Gift funds – different loan types have different rules around “gift” funds. Generally the gift must come from a close family member, your employer, or a religious organization. In any case, the gift donor will need to sign a gift letter and provide documentation of the flow of the gift funds from them to you. There are no limits on the amount of a gift you can receive, however there may be tax implications for the gift donor. It is also acceptable to use a “gift of equity” for a down payment. This is rare, and typically happens when someone is buying a home from a close family member for a discount. If the home is worth $100K, and they agree to sell it to the buyer for $80K, we can use that as a 20% down payment – provided the gift is documented property

    5.     Selling an asset like a car, collectible, or other valuable that’s not real estate – this is acceptable as a source of funds provided we can document ownership, value, and the sale transaction. This can be very tricky to document properly, so please discuss your plans with your loan officer before getting pre-approved.

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