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February 2015

Down Payment Options

By | Loan Talk | No Comments

Down Payment Options: Where Can The Funds Come From?

Over the last several years the approval process for loans has tightened up along with higher credit score and down payment requirements. Fortunately, this past year has seen some loosening of loan requirements, enabling more buyers to gain approval. This is stimulating the housing market.

Instead of requiring 20% down, loans are once again available with smaller down payments. FHA loans can be obtained with 3.5% down and some conventional loans are offering a 5% down payment option. This has spurred new bank programs requiring down payments of under 5%.

There are only two loan options that offer zero percent down and those are VA loans for veterans and some special programs for physician’s loans. Even with a zero down option a buyer may still be responsible for 2% to 3% in closing costs, which can add up to thousands of dollars.

How Much Down Payment Do You Need?

Down payments are a percentage of the cost of the home, therefore it will vary based on the sales price. For easier calculations consider that 1% of a $100,000 loan is $1000. This means a $500,000 loan with 5% down will require $25,000 plus another 10,000 to $15,000 in closing costs.

Where Can the Down Payment Come From?

Borrow from your 401K. If you and/or your spouse have a 401K with your current employer it is possible to borrow up to 50% of the vested balance for a down payment on a home purchase. While this is a loan that must be paid back, essentially you are paying yourself and the interest is added to account balances. The key disadvantage to a 401K loan is that if you change jobs you must pay back the 401K loan or it will be considered a distribution that will be both taxed and penalized if you are under 59 1/2.

If you are buying a home and starting a new job, this may not be a viable option because the 401K must be held at your current employer. It is sometimes possible to transfer 401K balances from a previous employer to the new employer, enabling you to take advantage of this option.

IRS Distribution. The IRS rules allows you to withdraw up to $10,000 to purchase a new home. This option is available to first time home buyers who have not owned a home in the last 2 years and can only be used once. If the funds are withdrawn from a ROTH IRA then there will not be tax consequences. If you are withdrawing funds from a Traditional IRA then the 10% early withdrawal penalty is waived as long as the requirements are met. You will, however, still be responsible for taxes at your ordinary income rate.

Gift from Parent, Grandparents or other direct relative. This is a common way to obtain a down payments if your parents or other relative are in a position to help. The gift laws allow for up to $14,000 to be gifted per person per year. This means your mother and father can gift you $14,000 each providing a tax free gift of $28,000 in a single year. If you have a spouse that number could rise to $56,000. Note that lenders generally require a letter with the gift stating it is a gift and does not have to be repaid. Some lenders want to see the money in an account for 60 days prior to closing. It is important to review the requirements with your lender.

Borrowing funds from others. If your parents or relatives cannot gift funds perhaps they are able to lend you the money for a down payment. When this occurs the loan payments that must be repaid will be considered in the debt to income used by the lender. This might reduce the amount of the loan approval but can provide a way to get into a home without having saved to full down payment amount.

Many states offer down payment assistance programs, however, these are generally reserved for low to moderate income earners and physicians typically will not qualify. Another option would be to seek grants that can be used to purchase homes. In this case the neighborhood or type of home will likely dictate the ability to be approved for the grant.

Physicians have the benefit of loans that are specifically geared towards your needs. This includes lower down payment requirements and sometimes no down payment options. Closing costs will generally still be required and can add up to a significant amount. If you are choosing a zero down payment physicians loan, consider asking the seller to assist with the closing costs, keeping the amount needed at closing to a minimum.

How not to become house poor

By | Life Coach, Loan Talk | No Comments

How Not To Become House Poor

Buying your first home after medical school is an exciting time. You are finally going to be receiving a real paycheck for all of the hard work you have put in for over a decade. It is tempting to jump right into the house hunt and buy the largest house you can afford. This can result in buying too much house and struggling to make payments or maintain the home properly.

Meeting with a lender before you begin looking for a home is always recommended because they can steer you in the right direction and give you a price range for loan qualification. In addition, there are physician’s loans programs that offer very generous terms in regard to a low down payment, potentially waiving mortgage insurance and other factors that will impact the size of loan you qualify for.

However, there is no substitute for doing your own due diligence and being deliberate about determining what size loan you should pursue, regardless of what the lender is offering. This requires an honest look at your finances, budget and long term goals.

What is “House Poor”?

Being house poor is when a large percentage of your take home income goes towards housing costs. This includes mortgage payments, taxes and insurance, utilities and home maintenance. Every home, regardless of age, needs continual maintenance. If you plan to hire a housekeeper or landscaper on an ongoing basis, these costs should also be included in your overall housing expenses. It is recommended that housing costs be no more than 25% to 33% of your total income before taxes. This will give you enough discretionary income to pay your other living expenses as well as save for future needs like college funds for your children and retirement. Some loan programs stretch these numbers and it is possible to qualify for a home loan that will be difficult to pay, depending on your personal lifestyle and budget.

The challenge with any general range is that it does not take your personal circumstances into account. This is why completing your own budget and analysis is advised. Look over what your current bills and obligations are. Consider how much you want to put away for future needs, how much you will donate to charitable causes, and what family hobbies or sports you participate in. This may require you to adjust the size of mortgage you want to be responsible for.

What Do Lenders Count in Debt to Income?

One of the key numbers lenders will look at to determine the amount the bank is willing to lend is debt to income. Basically they look at your credit report and take the minimum payments listed on the report for all debt. This will include car loans, student loans, credit card debt and the like. From there they establish an acceptable debt to income.

Many families pay significantly more than the minimum payment on debts. Lenders also do not count how much you are saving each month, how much insurance payments are, or how many children you have to support. They also do not consider lifestyle, the travel and entertainment budget, hobbies or sports you participate in or organizations that you may volunteer both time and money.

For this reason, considering your actual budget will provide a monthly mortgage payment that you are comfortable with managing. A home purchase is a long term proposition and buying a home that stretches your budget will increase the stress in your life, and impact the amount of discretionary income you have.