Tag: down payment (Page 1 of 3)

The Benefits of Borrowing from a 401(k) for a Down Payment

June 27, 2023 / Tom Bonetto

One legitimate option for those looking to make a home purchase is to borrow from a 401(k) retirement account to cover some or all of the down payment.

As we all know, purchasing a home is a significant milestone in many people’s lives and it often requires a substantial down payment, which can be a barrier for aspiring homeowners.

An often-used solution is to borrow from a 401(k) retirement account and utilize those funds for the down payment.

While there are risks involved, there are multiple reasons why borrowing from your 401(k) can be a good idea.

Accessibility and Convenience

Borrowing from one’s 401(k) for a down payment provides a readily accessible source of funds.

Since it’s your own retirement savings, borrowers won’t have to go through extensive approval processes or meet stringent credit requirements as you might with traditional financing options.

This convenience can expedite the home-buying process, enabling you to seize opportunities in a competitive housing market.

Lower Interest Rates

When borrowing from your 401(k), you typically pay yourself back with interest.

While interest rates vary, they are often lower than those associated with traditional loans, such as HELOCS or personal loans.

By utilizing 401(k) funds, you may be able to save money on interest payments over the long term, making it a cost-effective option for financing your down payment.

No Need for Private Mortgage Insurance (PMI)

One advantage of borrowing from your 401(k) is that it eliminates the need for private mortgage insurance (PMI).

PMI is typically required for homebuyers who put down less than 20% of the purchase price. By utilizing your 401(k) funds, you can increase your down payment and potentially avoid the additional cost of PMI. And that can save you a significant amount of money over the life of your mortgage.

Repayment Flexibility

Borrowing from your 401(k) provides you with repayment flexibility.

While it’s crucial to adhere to the repayment terms to avoid penalties, you have the opportunity to repay the loan on your terms.

This flexibility can be especially beneficial if you encounter financial hardships or unexpected expenses in the future, as you can adjust your repayment schedule accordingly.

Building Home Equity

By utilizing your 401(k) funds for a down payment, you can expedite your entry into the real estate market and begin building equity in your home sooner.

Home equity is an asset that can grow over time, potentially providing you with a source of financial stability or the ability to leverage it for future investments or other financial goals.

Conclusion

While borrowing from your 401(k) for a down payment on a home is a decision that should be carefully considered, it can offer several advantages.

The accessibility, lower interest rates, potential elimination of PMI, repayment flexibility, and the opportunity to build home equity are compelling reasons to explore this option.

With proper planning and responsible management, borrowing from your 401(k) can be a beneficial strategy to turn your dream of home ownership into a reality.

Nevertheless, it is crucial to weigh the risks involved and consult with financial advisors to make an informed decision that aligns with your long-term financial goals.

I also advise that you contact your financial planner to see if this might be a good option for you.

Contact me to discuss your current situation and how you might be able to take advantage of your 401(k) and purchasing a home. It would be my pleasure to help you!

Debunking the Myth: You Don’t Need a 20% Down Payment for a Mortgage

May 30, 2023 / Tom Bonetto

The idea of needing a 20% down payment for a mortgage has long been fixed in the minds of prospective homebuyers. However, this traditional belief doesn’t hold true in today’s dynamic housing market.

With evolving loan options and changing financial landscapes, it’s important to debunk the myth and explore the advantages of bringing in a small down payment when securing a home loan for a primary residence.

Accessibility and Affordability

Requiring a 20% down payment can be a big hurdle to homeownership for many. For first-time buyers or those with limited savings, this amount may be prohibitively high.

Fortunately, many mortgage programs exist that allow for lower down payments, such as Federal Housing Administration (FHA) loans, which require as little as 3.5% down.

VA loans for those in our military and our veterans can require no down payments whatsoever!

These options make home ownership far more accessible and affordable for a broader range of would-be buyers. This provides new opportunities for individuals to enter the market and build equity.

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

FHA Loan: 3.5% down payment minimum
VA Loan: No down payment required
HomeReady/Home Possible Conventional Loan (with PMI): 3%
Conventional Loan (with PMI): 5%
Conventional Loan (without PMI): 20% minimum
USDA Loan: No Down Payment required

PMI is “private mortgage insurance”…and you can find out more about that here…

You can also find out more on the specifics of multiple mortgage types here…

By allowing lower down payments, lenders offer more financial flexibility to aspiring homeowners. This means that you can become a homeowner sooner and start building equity in your own home right away!

Opportunity for Building Wealth

Rather than waiting until they accumulate a large down payment, individuals can enter the housing market sooner by utilizing mortgage programs with lower down payment requirements.

white paymaster ribbon writer adding machine placed on tabletop

This early entry enables homeowners to benefit from potential property appreciation, which can be a valuable source of wealth building over time.

By leveraging their down payment funds to secure a mortgage and invest in a property, individuals can start building equity and potentially generate significant returns in the long run.

Would-be borrowers can also utilize gifts from relatives for their down payment and closing costs. Find out more on that here…

Flexibility and Financial Freedom

Earmarking a significant portion of savings towards a down payment may leave homebuyers financially strained, limiting their flexibility and ability to handle unexpected expenses or invest in other areas.

Opting for a lower down payment allows buyers to retain more cash on hand, providing a financial safety net and allowing for future investments or potential home improvements.

This increased flexibility enhances financial freedom and offers peace of mind in managing homeownership-related expenses.

In Conclusion

The belief that a 20% down payment is necessary for obtaining a mortgage is no longer an absolute truth.

While a larger down payment can offer certain advantages, such as lower monthly payments, it is essential to recognize the benefits of alternative mortgage programs with lower down payment requirements.

These options promote accessibility, affordability, and the opportunity for investment and wealth building. By understanding the evolving landscape of mortgage financing, prospective homebuyers can make informed decisions that align with their financial goals and aspirations.

So please do reach out to me for more, as it would be my pleasure to help you structure your loan and down payment options.

Using Gift Funds for Down Payments and Closing Costs – A Primer

May 1, 2023 / Tom Bonetto

When it comes to buying a home, one of the biggest obstacles for many buyers is the down payment. But did you know, borrowers can use gift funds for that down payment?

Believe it or not, many homebuyers turn to family and friends for financial help.

25% of homebuyers ages 23 to 31 and 17% of those ages 32 to 41 received gifts from relatives or friends to help with their down payment, according to the National Association of Realtors.

Secondly, down payment requirements are much different today than they have been in the past, as FHA loans and some conventional loans often have low down payment requirements, as little as 3% in some cases.

And, yes, borrowers can absolutely use gifts from family members toward those down payments!

Who Can Gift Down Payment Funds?

Lending regulations won’t allow borrowers to use a cash gift from just anyone to qualify for a mortgage. The funds usually must come from a family member, such as a parent, grandparent, or sibling.

It’s also generally acceptable to receive gifts from your spouse, domestic partner, or significant other if you’re engaged to be married.

Restrictions on Down Payment Gifts

Both conventional loans and FHA loans allow gifts as down payments. There is no minimum borrower “contribution” for a one-unit, primary residence, even when bringing in less than 20% down for conventional loans.

House Made of Puzzles Pieces with Money Printed on It

That gift can cover the entire down payment and the closing costs.

For 2-4 unit primary residential properties, the borrower must make a 5% minimum borrower contribution from their own funds, per lending regulations for conventional loans. FHA loans do not have this requirement.

After the minimum borrower contribution has been met, gifts can be used to supplement the down payment, closing costs, and reserves.

It’s important to know that gift funds may NOT be used for investment property purchases.

Mortgage Gift Rules by Loan Type

FHA loans: The Federal Housing Administration (FHA) backs mortgages with a minimum down payment of 3.5 percent. The entire amount can be gifted, but the FHA requires a letter and supporting documents from the gifting party. Bank/asset statements showing the giver has had the funds for 60 days will be required.

Conventional loans (Fannie Mae/Freddie Mac): When purchasing a single-family residence, the entire down payment can come from a gift. These funds can come from a relative, employer, close longtime friend, or a nonprofit. Freddie Mac also allows borrowers to use wedding gifts, so long as you provide a copy of your marriage license.

VA loans: The U.S. Department of Veterans Affairs (VA) guarantees home loans for eligible military borrowers. VA loans require no down payment, but VA guidelines allow borrowers to put gift funds toward closing costs or a down payment, if they so choose. The documentation rules are similar to those of FHA loans.

USDA loans: The U.S. Department of Agriculture (USDA) guarantees no down payment-mortgages to borrowers with low to moderate income in rural corners of the country. Like the VA loan program, gift money can be used to pay closing costs. Borrowers must provide a gift letter and supporting documents consistent with the gift letter rules of other loan programs.

Documenting a Down Payment Gift

Lenders require the borrowers to provide some detailed documentation any time a down payment gift is used. Specifically, the borrowers will need to produce a letter which includes the name of the donor, their relationship, the date and amount of the gift, and a statement that says the money has no expectation of repayment.

Both parties will need to sign the letter and the lender may also require additional documents. For FHA loans, borrowers will need to show copies of the donor’s bank statements to prove that they’re actually in a position to make a gift.

In Conclusion

If your family decides to help you out with a down payment gift, you as the recipient should be extremely grateful.

However, like any large financial move, there are some rules and regulations to consider. So please do reach out to me for more, as it would be my pleasure to help you structure your loan and down payment options.

First-Time Buyers: Facts Young Home Buyers Should Know

January 24, 2022 / Tom Bonetto

joyful young couple dancing after moving in new purchased apartment

As we all know, there’s a good deal of anxiety out there for first time home buyers. Home ownership is a major investment and isn’t something to be taken lightly. This one of the most important financial decisions one can make…and it will have a long term effects in building wealth.

It is never too early to start planning for your financial future, including that first home purchase.

There are some serious benefits to home ownership, to be sure (and you can find out more on that here…).

However, there are a few things that young homebuyers frequently fail to consider when starting the home buying process.

Let’s take a look at these key facts…

The Home Buying Process Begins With Mortgage Pre-Approval

Before you start looking for that dream home, would-be buyers need to have a good understanding of their overall financial position. This means having financial information readily available, such bank, savings, and investment statements.

You might want to check your credit score via a free, online site. While it won’t give you the exact score, it will give you a good idea of what to expect. More on that here…

It’s important to konw that mortgage interest rates tend to be higher with lower credit scores, which can dramatically affect the total costs associated with a new home purchase.

In general, saving for a down payment is sometimes viewed as one of the biggest obstacles for homebuyers, but that does not have to be the case. There are a wide variety of down payment options available – from 0% to 20%+! You can find out more on that here…

Home Ownership Becomes Less Affordable the Longer You Wait

With mortgage rates starting to rise along with home prices appreciating, putting off buying a home now could cost you much more later.

a couple taking a selfie with their new home key

Sam Khater, Chief Economist at Freddie Mac, recently noted, “As the economy progresses and inflation remains elevated, we expect that rates will continually rise in the second half of the year.”

Most experts also forecast interest rates will rise in the months ahead, and even the smallest increase can influence your buying power. So, if you have been on the fence about buying a home, there really is no time like the present to purchase one.

Do you think you might be too late and have missed out on purchasing? Not at all! You can find out more on that here.

Know What You Can Afford and Your Mortgage Options

Some young homebuyers are unsure they can actually afford a mortgage payment for a home that suits their growing needs.

Fortunately, there are a multitude of options! For example, the Federal Housing Administration (FHA) loan for first-time buyers (and a minimum 3.5% down payment). Or a VA loan backed by the Department of Veterans Affairs (if you qualify), along with other home loan programs available to you.

a couple walking through the door while carrying boxes

What’s more, many buyers may be able to afford more home than you think. It’s important to work with a mortgage professional who can help analyze the different programs to find one that suits your individual needs.

Knowing how much home you can afford and understanding the current market when starting the process are musts—and could be just what you need to stop renting and start buying.

Would you like to find out more? Contact me to discuss your current situation and how you might be able to take advantage of today’s real estate market. It would be my pleasure to help you!

Down Payment Options – 20% Down Not Necessarily Required

October 13, 2020 / Tom Bonetto

“How much should my down payment be for a house?”

It’s a question that I hear all the time from would-be home buyers.

And, the answer is: “it depends,” as it really will vary by buyer.

I’d highly recommend that you check out Dan Green’s article at The Mortgage Reports for more.

Per Mr. Green: “If you’re a home buyer with a good deal of cash saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, your loan size shrinks, reducing the size of your monthly payment.”

Or, perhaps your situation is reversed.

“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”

Dan continues: “One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually true.”

“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.

Larger Down Payments Actually Increase Risk

Green continues: “As a homeowner, it’s likely that your home will be the largest balance sheet asset. Your home may be worth more than all of your other investments combined, even.

In this way, your home is both a shelter and an investment and should be treated as such. And, once we view our home as an investment, it can guide the decisions we make about our money.

The riskiest decision we can make when purchasing a new home?

Making too big of a down payment.”

The Higher The Down Payment, The Lower Your Rate of Return

The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.

Consider a home which appreciates at the national average of near 5 percent.

Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.

That down payment affected your rate of return.

With 20% down on the home — $80,000 –your rate of return is 25%
With 3% down on the home — $12,000 — your rate of return is 167%

That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!

Tag: down payment (Page 1 of 3)

The Benefits of Borrowing from a 401(k) for a Down Payment

Accessibility and Convenience

Lower Interest Rates

No Need for Private Mortgage Insurance (PMI)

Repayment Flexibility

Building Home Equity

Conclusion

Debunking the Myth: You Don’t Need a 20% Down Payment for a Mortgage

Accessibility and Affordability

Opportunity for Building Wealth

Flexibility and Financial Freedom

In Conclusion

Using Gift Funds for Down Payments and Closing Costs – A Primer

Who Can Gift Down Payment Funds?

Restrictions on Down Payment Gifts

Mortgage Gift Rules by Loan Type

Documenting a Down Payment Gift

In Conclusion

First-Time Buyers: Facts Young Home Buyers Should Know

The Home Buying Process Begins With Mortgage Pre-Approval

Home Ownership Becomes Less Affordable the Longer You Wait

Know What You Can Afford and Your Mortgage Options

Down Payment Options – 20% Down Not Necessarily Required

Larger Down Payments Actually Increase Risk

The Higher The Down Payment, The Lower Your Rate of Return

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