Finding a home to buy can be difficult enough, but working out the best way to finance your purchase can sometimes require considerable thoughtfulness, creativity and patience, too. One of the fundamental issues associated with the question of financing the purchase of your new home is the down payment and of course your closing costs.
Where is the money for your down payment and your closing costs going to come from? The obvious sources of course are saving, checking and money market accounts, stocks and bonds and other investments, which can be liquidated or borrowed against. Keep in mind that in borrowing against your assets rather than liquidating them you will be effecting your ratio of debt to income, which may in turn negatively impact your ability to qualify for the mortgage for which you are applying. Liz Moeller of Parmann Mortgage advises that once you have qualified for a loan and even before you start looking for a home, if your mortgage payment will be more than the rent you are paying now, it's a good idea to put the difference in your savings account, not only to add to the balance, but also to get used to the payment of that additional money each month.
Your pension or 401K tax deferred savings plan at work might be another source of down payment and closing cost money. These plans can be borrowed against or liquidated. In borrowing against money in these plans you will be paying yourself back rather than someone else while bringing the plan back to full funding and may not suffer any tax penalty. Debt resulting from borrowing against your pension or tax deferred savings plan does not effect your ratio of debt to income nor negatively impact your ability to qualify for the loan for which you are applying. If you liquidate your tax deferred savings or 401K plan you will most likely not only pay income taxes on the liquidated funds but may also pay additional penalties for early withdrawal. Check with your accountant as well as your professional mortgage lender.
Gift money is of course another great source of down payment and closing cost money. The donor must be a family member and be willing to sign a gift letter stating that the funds being given need not be repaid. The lender will want a copy of this letter and most likely will want a copy of the gift check. If you sell a vehicle, a work of art, or other asset to raise money for your down payment and closing costs, keep track of the transaction so you can verify the source of these funds. Be able to produce receipts, a bill of sale or a copy of the buyer's check, for example.
Money borrowed against credit cards is generally not an allowable source of funds for down payment or closing costs. Only money resulting from borrowing against one's own assets is permitted as a source, and money resulting from credit card borrowing could neither be verified as not borrowed nor borrowed against assets. Keep in mind that most mortgage lenders will want to see up to 3 months of a borrower's bank statements when considering them for a loan.
Don't forget to consider the seller of the property you are buying as a source when considering your closing costs. Most loan programs according to Liz Moeller of Parmann Mortgage will allow the seller to pay some of the buyers closing costs up to 3% of the purchase price.
Consult a number of professional mortgage lenders and your accountant when considering sources of down payment and closing cost money to help you determine the most suitable plan for you.
Steve Hubbard owns and operates Steve Hubbard Real Estate Services.