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While this section is about where to
turn for a down payment, buyers need to know that a
good deal of the money paid up front to purchase real estate goes
toward escrow charges and lender fees. Although buyers can negotiate
with sellers or their lender to get some of these "closing costs"
covered by another party, every buyer has to come up with some money up front.
A buyer will, in most all
circumstances, need a minimum of $850 to $1,500 that he can access
immediately. However, the amount needed will vary according to: (a) the value
and apparent condition of the property the buyer wants to purchase; and (b)
the contract terms that the seller is willing to accept. This minimum amount
needed will be used to pay the deposit on a purchase contract and to pay any
fee associated with professional inspection of the property. The
total of all typical closing costs ranges from about $5,000 to $15,000,
depending on the price of the property being purchased. Beyond that amount,
each buyer needs a down payment commensurate with the risk he or she is
willing to
take. The higher the down payment made, the less risk the buyer assumes for future
changes in the market or in his financial situation. (For an explanation, read
The "No Money Down" and
"No-Cost" Options.) For
buyers with little cash who are convinced that home ownership is for them,
lenders have developed programs to help buyers get into a home with almost no
closing costs and little to no down payment. Most buyers, however, have some
resources available for a down payment. Some buyers may not even know of some
resources they can tap for cash to make a down payment.
Most people, especially first-time
buyers, think of money from a savings or money market account when they think
of making a down payment. This is the best place to start, putting away as
much money as possible each month until enough has built up for a down
payment. But other sources are available too. Whatever
the source of your down payment, it should be reasonable and explainable.
Lenders know that they assume less risk from borrowers whose money comes from
regular and legitimate sources. Hence, a lender may ask for documentation of
the nature and origin of any deposits that are large or unusual. Stocks,
Bonds & Mutual Funds These
days, many people have Investments in stocks, bonds or mutual funds. Although
most people start with saving at their local bank or credit union, they
eventually turn to other kinds of investments for a greater return than a
traditional savings vehicle can offer. Besides, the costs to invest in stocks
and bonds are so low today that most people can afford to put some of their
money here. Depending on the
relative strengths of real estate and the market for your other investments,
it could be time to cash out some of those other investments to make a real
estate purchase. Talking to an accountant and to a broker who is experienced
in the NW Oregon real estate market will help determine if this could be a
good route to take currently. When the value of U.S. stocks plummeted in March
2000, NW Oregon investors in droves dumped their stocks and used the cash to
invest in real estate. If part of your down payment will come from the sale of stocks
or other investments, be sure to keep copies of all documentation that applies to the sale.
A lender may want this to verify that the money came from a legitimate source.
This is especially necessary when an investor holds stock certificates himself
rather than leaving them with a broker. Gifts Many
lenders allow down payment help to come in the form of a gift of money from a
close friend or family member. Such a lender will require the donor to write
and sign a letter (or to fill out a special form) called a "gift letter." The
gift letter acknowledges the relationship between the giver and recipient,
along with the address of the property being purchased, the amount of the gift
and, sometimes, the source of the funds. The letter also needs to specify that
the funds are clearly a gift and not required to be repaid.
Most lenders also will require evidence that a down payment donor had the
ability to make the gift. They may require a copy of a bank or stock statement
from the donor, for example, to show that the donor had the funds available.
The gift recipient (the buyer) should make sure to get the gift in the form of
a check, and to keep a copy of the check along with the deposit receipt
verifying deposit of the check into the buyer's account. Retirement Accounts
Depending on their employer, people today have a variety of retirement
programs they can draw from for a down payment. The possibilities are an
alphabet-soup-list of names: IRA, 401k, 403b, Roth IRA, Keogh, SEP-IRA, etc.
(It is extremely important to discuss your specific financial details and
needs with a qualified accountant before taking money from a retirement
account.) Some employers' 401k
or 403b plans allow employees to withdraw up to a specified amount of cash for
a specific purpose, such as a medical emergency or a home purchase. Others
allow employees to borrow against the value in their plan. As with all large
sums of money received around the time of a contemplated home purchase, be
sure to keep copies of all checks and deposit receipts. Be
aware that some lenders will count loans taken out against the value of a 401k
or 403b plan as additional debt to go along with car payments, credit cards and other obligations. This may
seem odd but, from the lender's point of view, these plan repayments are still
a monthly obligation that must be paid. For borrowers whose debt-to-income ratios
are marginal in qualifying for a home loan, this could be an important
consideration. Be careful not
to borrow against a retirement plan until after consulting a lender. Depending
on circumstances, it could be more reasonable to take cash out of an account
and pay the tax penalty, rather than borrow against the account.
Employers
Some employers, usually larger companies, offer down payment assistance to their employees.
A variety of concerns may fuel the rationale behind these employers' programs.
Some may feel that homeowners are more stable and reliable employees. Other
may feel that offering down payment help promotes higher morale and stronger loyalty to the firm. When
considering a purchase, talk to your supervisor or your company's Human
Relations department to see if your company offers a down payment assistance
program. If so, ask about how and when to apply, and about any limitations.
Carefully document any funds received. Mortgage
lenders often will not allow an employer to make a loan to an employee for
purposes of a home down payment, so it's important that the employers' program
not require repayment of the funds. Also remember that money from an employer
will be counted as income for tax purposes. Savings Bonds U.S.
Savings Bonds can be converted to cash for a down payment. However, Savings
Bonds that have not reached their maturity will be worth less than their face
values. Any bank or credit
union can convert a Savings Bond to cash. Keep copies of the paperwork the bank provides because
it will establish the current value of the bonds and show the amount of money
you received for them. Sales
of Personal Property Virtually
any kind of personal property can be converted to cash for a down payment,
provided it has sufficient value and can be sold quickly enough. Cars, boats, furniture, guns, collectible
coins, rare stamps, antiques, valuable artwork, jewelry, clothing, sporting
equipment and a plethora of other
items may hold the cash value needed to raise a down payment. Remember,
loan programs are available that allow buying a home with very little money
down and almost no closing costs. Raising only a few thousand dollars may be
all that's needed to purchase that first home and get started down the road to
building wealth instead of paying rent. Selling
personal property in advance of making a home purchase must be done carefully
though. Deposits of money from the sale of personal property must be legal,
reasonable and verifiable.
For homebuyers who do sell personal property in order to come up with a down payment, the verification process can be arduous. Lenders are much stricter about documenting this method of
raising cash.
Selling a vehicle, such as a car,
boat or motorcycle, is perhaps the easiest to document. Show that you own the
vehicle by providing copies of the registration and title documents, then
document the "Blue Book" value. Next photocopy the documents showing
transfer of the vehicle and the amount of the sale price. Next, photocopy the
check or cash used for the purchase, along with the name and address of the
purchaser. Lastly, provide a receipt showing deposit of funds from the
purchase into your account.
Selling other kinds of personal property
is more difficult to document only because ownership of other items is usually
not as carefully documented as that for a vehicle. When selling property, you
must prove you legally owned the property and that it had the actual value for
which you sold it. If you can't document these things, a lender likely will not view the sale as an acceptable source of funds. Documents
that can be used to show ownership of personal property include purchase
receipts, bills of sale, letters from witnesses or copies of inventory sheets.
Photographs can help document an item's condition but, to prove value, it may
be necessary to consult a qualified appraiser or a specialist with knowledge
in the particular kind of property being sold.
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