Coming Up with a Down Payment

By Daniel Duffield

Acceptable Sources for Mortgage Down Payment Funds

One of the most difficult steps toward home ownership as a first time home buyer is securing the funds necessary for a down payment. While many borrowers will save up the funds for years in order to put forth enough money to obtain a home purchase loan, down payment funds can come from various sources. However, borrowers should note that down payment requirements differ between loan programs.

In general, down payment funds can be acquired from the sources listed below. While some borrowers may be familiar with some of these down payment options, many of these options are not commonly known and can make the difference between purchasing a home now or later:

•  Checking or Savings Accounts
• 401k
• Stocks
• Bonds
• IRAs
• Keogh Plans
• Trust Accounts
• Cash Value of Life Insurance Policy
• Gifts (Restrictions apply)

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Down Payment Gift Restrictions

Gifts for down payments can only be accepted from relatives, close friends, employers, labor unions, charitable organizations, or government agencies/enterprises that provide home ownership aid. Essentially, the person or organization that assists in the down payment should not have an interest in the property sale. Therefore, any party that provides a down payment gift cannot stand to profit from the sale of the property.

Down Payment Regulations by Loan Type

Fannie Mae and FHA Down Payment Considerations

For home purchases of primary residences, FHA and Fannie Mae mortgage loans allow borrowers to receive gifts that amount to any and all necessary up-front fees when closing the loan. As a result, borrowers can purchase homes with these loans without any money out of pocket for down payment or closing costs.

FHA Down Payments

The majority of lenders will prohibit the use of saved cash at loan closing, as the source of this cash cannot be determined. However, in addition to any gift funds received from acceptable parties, the FHA permits that borrowers use any cash saved at home, provided that borrowers submit a letter of explanation that gives satisfactory information on how these savings were obtained. Accordingly, this savings amount must correlate to the borrower’s annual salary; for instance, a borrower making $30,000 annually will not be able to use $100,000 of saved funds without sufficient explanation of how more than double the borrower’s annual earnings were saved.

The FHA also permits borrowers to sell personal property in order to gather the necessary funds for closing costs or the down payment. In these cases, borrowers must provide an estimate of the value of the items sold, as well as evidence that said items were purchased by an outside party. It is advisable to speak with your mortgage lender prior to selling any items.

Freddie Mac Down Payment

For Freddie Mac home purchase loans, borrowers can purchase a primary residence using pooled funds as a down payment. Basically, pooled funds refer to funds collected by family members who live together and plan to continue residing together in the new property once purchased. While some additional regulations apply, these pooled funds are generally acceptable.

While this article has provided a fair list of down payment options, many more creative alternatives exist. Ask your mortgage professional what options may be available for your home purchase down payment.

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