Real Estate Information Archive

To successfully purchase a home today, you will need a down payment of at least 3.5% of the purchase price. Gone are the days of no down payment alternatives, down payment assistance and seller-offered programs to come up with the money needed to buy a home. Instead, let’s look at the five ways you can come up with a down payment to seal the deal.

1. Gift Money
Gift money is simply that — a gift from family or documented close relationship. The giftor needs to provide a gift letter and paper trail of the monies they are gifting for the benefit of the buyer. In other words, they’ll have to provide a bank account showing they had the ability to gift the money. In short, gift monies cannot be funds sitting at home in a safe.

2. 401(k)/Retirement Loan
Typically, borrowed funds for a down payment are a no-go, but the exception is a 401(k) or equivalent retirement account (or current home equity line). If you can borrow money from your 401(k) for your down payment, this is accepted for obtaining a purchase mortgage loan.

Note: Depending on the terms of your loan, this could be counted as a liability and factored into your debt to income ratio.

3. Sale of a Good
Believe it or not, you can sell your recreational vehicle and use the net proceeds from the transaction as your down payment. Let’s say you decide to sell your motorcycle for $10,000. You’ll need to provide the full bill of sale — as well as the bank statement depositing those funds, matching the bill of sale — to your mortgage lender. Same goes for any other recreational vehicle, or other item that “makes sense.” The key is as long as it’s plausible and passes the litmus test and you can paper trail the monies from start to finish, you should have no problem using those monies for the house purchase.

4. Trust Funds, Settlement Awards, Etc.
If you come into a chunk of change via an inheritance, settlement, lottery winning, trust fund disbursement, family buyout, even a gambling victory, all of these monies can be used for the down payment as long as the sourcing of the monies is fully documented from A to Z with no stone left unturned. Matching of the amounts of monies used to the original deposits will be required when it comes time to secure the loan.

5. Line of Credit
Where a down payment lacks, enter strength in income. You can take out a line of credit or a personal loan, deposit the full funds into your bank account and after two months, the funds will be eligible for use in the transaction.

While a down payment is needed to purchase in the current real estate market, a prudent homebuyer should also have plans for having available funds for closing costs. The same out-of-the-box strategies listed above can also be used to procure funds for closing costs.

Closing costs run 3% of the purchase price, on average. So the total funds to close would be sum 3% of purchase price +3.5% down.

Do your homework. If you don’t have a down payment for a house, or your down payment is coming from more than one source, make sure you talk to a lender upfront so they can help you navigate the best way to properly support and document your monies used. Doing this on the front end will save you from wasting time creating and gathering unnecessary paperwork.

The earnest money deposit is an important part of the home-buying process. It tells the seller you’re a committed buyer and helps fund your down payment.

What Is Earnest Money?
Earnest money is a deposit on the house you want to buy. It shows sellers that you are earnest about buying their home.

Without earnest money, you could make offers on many homes, essentially taking them off the market until you decided which one you liked best. Sellers rarely accept offers without deposits.

Assuming that all goes well and you buy the house, the earnest money will go toward the down payment and closing costs. In many circumstances, you can get most of your deposit back if you discover something that you don’t like about the home.

How Much Should You Put Down in the Earnest Money Deposit?
The amount of the deposit varies. In a slow real estate market, $500 or $1,000 might be enough. When there is more demand for the house, the seller will require more — usually 1-3 percent of the offer.

In some markets demand is so great that the seller will look for a higher deposit before accepting your offer over someone else’s. You can sometimes win a bid if you give the seller a large deposit. In fact, the seller may be willing to come down in price a little if you make a bigger deposit. If your deposit is extremely large, your mortgage lender may want to verify the source of the funds. As long as you can show you’ve had the money for at least 60 days, it won’t be a problem.

When Do You Pay the Earnest Money, and Who Holds It?
You hand over earnest money after your offer on a home has been accepted and you have signed the purchase agreement. The title company often holds the deposit. In some states, the real estate agent holds the deposit. Always check the credentials of the firm or broker taking the deposit, and verify that the funds will be held in escrow until the purchase goes through.

Never give the earnest money to the seller. It could be impossible to get it back if something goes wrong.

Can You Get Your Earnest Money Back?
If the deal falls through, a small cancellation fee is usually taken out of the deposit, but the remainder remains in escrow. Whoever holds the deposit determines whether you should get the money back under the terms of the purchase agreement.

Make sure that the purchase agreement covers how a refund is handled. Eager buyers sometimes give up their rights. But keep in mind that even if you are pre-approved for a mortgage loan, you can be declined when you apply for one. Standard contracts allow you to recover your earnest money deposit in this case. You can also usually get your money back if you find problems with the property.

Laura Sherman wrote this article.