Down Payment Assistance Programs

USDA Loan Rules Regarding Gift Funds for Down Payment

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USDA loans don’t require a down payment, so you probably think you don’t have to worry about gift funds for this loan. However, there are times when USDA borrowers need funds from others to cover their closing costs. Just because you don’t have to put money down on the home doesn’t mean the lender and involved third-parties won’t charge closing fees.

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What are the rules for gift funds and USDA loans? Keep reading to find out more.

What are Gift Funds?

First, let’s look at the definition of gift funds. Any funds you receive from a relative, close friend, or employer in connection with the purchase of your home are gift funds. The donor provides you with the necessary funds to cover the cost of buying the home, or at least part of the cost.

Before you just accept funds from any friend or relative, though, you should know what the USDA requires regarding gift funds.

How Can you Receive Gift Funds?

Your relative, friend, or employer offers you great assistance by providing you with gift funds, but they can’t just hand you a check and think it’s all done. The USDA and their lenders require a specific process to occur in order to receive the funds:

  • The donor gives you the funds in the form of a check. A cashier’s check is best.
  • Make a copy of the check before you deposit it in your bank account.
  • Deposit the check in the bank account that you’ll use to withdraw funds for closing.
  • Keep a copy of the deposit ticket for the lender.
  • Have a copy of your bank statement showing the deposit for the exact amount of the check.
  • Leave the money untouched.

The Importance of the Gift Letter

In addition to the above process, the donor must also write a Gift Letter. This letter is just a statement letting the lender know the following:

  • The date of the gift
  • The amount of the gift
  • The reason for the gift
  • The address of the home the funds are intended for use on
  • The fact that the funds are not a loan

The donor should sign and date the letter to complete it.

Tracing the Donor’s Funds

Even though the donor provided a gift letter and you followed all of the necessary steps, the lender still must verify the origination of the donor’s funds. In other words, the lender needs to make sure that the donor didn’t borrow the funds somewhere. This is a way for borrowers to hide a loan, by having a ‘donor’ take the loan out and then gift them the funds.

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Donors can prove origination of the funds by:

  • Providing their last two months’ of bank statements to prove that they have had ownership of the funds at least that long
  • Showing proof of the sale of an asset, such as a car, boat, or stocks
  • Providing investment statements for accounts that they withdraw the funds, such as a money market account

What can Gift Funds Cover?

Gift funds for a USDA loan can cover the closing costs or even help you get a little equity in your home. It’s up to you how you want to apply the funds. If you have the money to cover the closing costs on the loan, the gift funds can be your down payment. Any money you put down gives you immediate equity in the home, which isn’t a bad thing since most USDA borrowers have no equity in their home or very little equity for quite some time.

Other Ways to Cover USDA Closing Costs

What if you don’t have access to gift funds and you don’t have the money for closing costs? There are a few ways that you can still get help:

  • Ask the seller for help – Some sellers will give seller credits to help borrowers with their closing costs. They typically do this when there’s room between the sales price of the home and its actual value. The seller will typically negotiate a higher sales price with you in order to give you the credit for your closing costs. This way the seller walks away with the same profit and you get the loan approval that you need.
  • Roll the costs into the loan – You may be able to ask your lender to roll the closing costs into your loan. Again, the value of the home must be higher than the sales price, though. Lenders cannot give you a loan amount that is higher than the value of the home. This would put them at risk for default.
  • Negotiate a no-closing cost loan – Some lenders offer a no-closing cost loan. This means that you don’t pay any closing costs at the closing. Instead, the lender covers them for you. In exchange for the no closing costs, the lender will charge you a slightly higher interest rate.

Gift funds are one of the easier ways to get help with your USDA closing costs or even the down payment, should you want to make one. As long as you follow the rules and prove the origination and transfer of the funds, you should be able to use the gift funds to help you buy the home you want.

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Is a Survey Needed to Buy a House?

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A property survey can cost as much $500 on top of the thousands of dollars you already pay for closing costs. Is the property survey necessary when you buy a home?

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While law does not require it, your lender may require a survey before they’ll close on your loan. Even if you pay cash, you should consider a survey. The more information that you have before you buy a home, the better financial decisions you can make.

What is a Survey?

Let’s start with the basics of a survey so that you can make a logical decision. A survey is a professional drawing of a home’s property lines. It shows the home’s boundaries as well as the easements. The survey also includes a description of the property in words, to help you further understand the property’s boundaries and to determine if there are any encroachments on it.

Mortgage Lenders and Surveys

Most state laws don’t require homebuyers to pay for a survey. But, most mortgage lenders do require a survey. Lenders want reassurance that the home doesn’t overstep any boundaries. In other words, the lender doesn’t want anyone coming after you once you own the home because it puts the mortgage company at risk of default.

Paying Cash and Surveys

What if you pay cash for the home – do you still need a survey? Technically, you don’t have to pay for a survey if you don’t want to because you don’t have a lender to answer to. But, you should consider it. If you take the property at face value, who’s to say that someone won’t argue that your property oversteps the boundaries in the future?

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Just because a home has a nice patio, addition, or fence doesn’t mean it’s within the boundary lines. Wouldn’t you rather know before you put your hard earned money into a home whether it meets the boundary guidelines? Even though the legal description on the deed describes the property’s boundary, the survey acts as a ‘backup’ reassuring what it says in the property description. If the two don’t align, then it’s reason to worry.

Other Reasons to Pay for a Survey

If your lender requires a property survey, you have to pay for one if you want to buy the home. But what if it’s optional? What are the other reasons to pay for a survey?

  • Know if a neighbor’s fence, patio, or other amenities sit on your property
  • Know your property boundaries should you decide to add a fence or an addition to the home in the future
  • Know what areas of the land you can separate if it’s a large piece of land

A land survey protects you and the lender. While it’s an added expense, it protects you in the future. It’s a lot cheaper to pay for a survey now rather than paying to take out a section of your fence and rebuild it because you find out after the fact that it sits on your neighbor’s property.

In most cases, you will be required to pay for a survey, but if you have the option, err on the side of caution. The survey can protect you in the future or even help you make a decision before you buy the home. If the home has encroachments on its property already, you may not want the headache of fighting the neighbors about the encroachment. Knowing before you close on the home can help you make the right decision.

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Should You Pay Extra On Your Mortgage?

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Only a small part of your mortgage payment each month pays the mortgage’s principal balance down. The rest of your payment covers the remaining parts of your mortgage payment. This includes the interest, real estate taxes, homeowner’s insurance, and mortgage insurance. What if you want to pay the principal balance down faster? Do extra principal payments actually help?

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Keep reading to find out the truth about extra principal payments.

What Happens When you Pay Extra Principal on Your Mortgage?

Paying extra towards your mortgage’s principal has a direct effect on the amount of interest you pay. Your amortization schedule shows that your initial mortgage payments are interest heavy. In other words, you don’t pay much of the principal down for the first few years. Instead, your payments cover the interest for borrowing the money.

Making extra principal payments right away can knock your principal down faster. This helps cut time off your loan’s term and interest off the total amount that you pay. The extra money paid goes to the loan’s balance. This helps decrease the balance faster than if you followed the amortization schedule.

What are the Benefits of Paying Extra Principal on Your Mortgage?

You realize two main benefits with extra mortgage payments. You pay less interest and shorten the loan’s term.

Your interest is calculated based on the outstanding principal balance. Making extra payments toward the principal decreases the amount of interest paid over the life of the loan. As you continue to pay the balance down, the amount of interest owed decreases. This can save you thousands of dollars with consistent extra principal payments.

As you pay the principal balance down, the time it takes to pay the loan off in full decreases. With less money outstanding, your regular payments pay the principal down even faster. If you start making extra payments early in the loan’s term, it’s possible to knock several years off a loan’s term. This also helps build up equity in the home faster.

What are the Downsides of Paying Extra Principal on Your Mortgage?

There’s one major downside to paying extra towards your mortgage’s principal – the opportunity cost of the money you invest. If you don’t have an emergency fund set up or have retirement savings, start there first.

Once you pay money towards your mortgage, the money remains tied up in the home until you sell the home or refinance the mortgage. If you don’t have money in an emergency savings account (at least 3 to 6 months’ of expenses) or have retirement savings, you could put yourself in a financial bind tying the money up into your home.

Do Large Principal Payments Reduce Your Monthly Payments?

Large principal payments don’t change your monthly payment. Instead, as we discussed above, they reduce the time it takes to pay off your mortgage. You will reduce the loan’s term, but the payments remain the same.

For example, if your required mortgage payment according to your mortgage documents is $450 per month, and you pay $1,000 one month, you still owe $450 every month until the loan is paid in full. You can knock as much time as possible off the mortgage term, but the payments remain the same.

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How Much Time Does an Extra Mortgage Payment Take Off?

The time your extra payments knock off your mortgage depend on several factors:

– When you start making the extra payments

– How often you make the extra payments

– The interest rate on the loan

– The loan’s original term

You can use an online mortgage calculator to determine how much time you’ll knock off your mortgage. Enter an estimate of the amount of the extra payments you’ll make to get a good idea. The key is making consistent payments and starting them as early as possible. As we stated above, your initial mortgage payments are interest-based. If you hit the principal early on in the loan’s term, you knock the balance down right away. This can result in less interest owed over the life of the loan and more time knocked off the term.

Does Paying an Extra $100 a Month Make a Difference?

Even though $100 doesn’t seem like much, it can knock several years off your mortgage if you pay it every month. For example, on a $200,000 loan with a 30-year term and 5% interest rate, you could knock your term down to 24 years and 9 months rather than 30 years. You would also save $37,068 in interest over the life of the loan with consistent payments.

So while that $100 doesn’t seem like much, if you start right away, it adds up. Just in the first year alone, you’ll pay an extra $1,200 toward the loan’s principal. Over the course of 20 years, you knock the principal down $20,000, which means $20,000 that you don’t pay as much interest on.

Can You Pay a 30 Year Mortgage off in 15 Years?

It is possible to pay a 30-year loan off in 15 years without refinancing. If you decide you want to be mortgage free in 15 years, use an online mortgage calculator to determine the payments you need to make. Use your current interest rate and outstanding loan balance to get your answer.

If you take the 30-year term but make larger payments, you get the benefit of being mortgage free sooner. But if you run into trouble (lose your job, get sick), you don’t have to worry about affording the higher payment. You can also jump back to the minimum 30-year payment in order to stay in good terms on your loan.

Paying extra money towards the principal can help you in many ways. Make sure you set yourself financially in other areas of your life before investing more money in your home. But once you are financially secure, making those extra payments can save you thousands of dollars over the life of the loan.

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Save for a Down Payment or Pay Off Debt?

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Qualifying for a mortgage requires many things. You need money for a down payment, but you also need a low debt-to-income ratio. If you’re in over your head in debt, you may not get approved. But, if you don’t have a down payment, your loan options are limited.

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So which should you do – pay off debt or save for a down payment? It depends.

What’s your Debt Ratio?

Your debt ratio is one of the most important aspects of the mortgage application process. Too many debts make you ineligible for a loan. How much is too much? It depends on your income and the loan program.

Lenders look at your total debt ratio. This compares your total monthly debts (new mortgage included) to your gross monthly income. Think of debts like your credit card payments, student loans, car loans, and installment loans. Lenders total the required monthly payments and divide that by your gross monthly income. For example:

  • Total monthly debts $1,500
  • Gross monthly income $4,000
  • Debt ratio = 37.5%

Lenders then determine which loan program you fall into:

  • Conventional loans – Max housing ratio 28% and max total debt ratio 36%
  • FHA loans – Max housing ratio 31% and max total debt ratio 41%
  • VA loans – Max total debt ratio41% (they don’t have a max housing ratio)
  • USDA loans – Max housing ratio 29% and max total debt ratio 41%

A 37.5% total debt ratio is in line with FHA, VA, and USDA loans, but not conventional loans.

If you have a debt ratio of say 55%, for example, you exceed all maximum debt ratios allowed. In that case, paying off your debt makes more sense.

Find the perfect balance between paying debt down/off and saving for the down payment. Chances are that you’ll need some money down unless you qualify for a USDA or VA loan.

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How Much can You Save?

20% down payments aren’t required anymore. Sure, it’s great if you have it, but if you don’t, there are other options including:

  • Conventional loan minimum down payment 5%
  • FHA loan minimum down payment 3.5%
  • VA and USDA loans don’t require a down payment

You can get a loan with as little as 3.5% down. On a $200,000 loan, that means $7,000. FHA loans also have lenient underwriting guidelines. With higher debt ratio allowances and lower credit score requirements, you may find it easier to get approved.

Now, if you don’t have a lot of debt, go ahead and save more for the down payment. Most people today, however, have some type of debt. You’ll need to look at the big picture.

What Can you Afford?

Think about what you can afford. Don’t look at the numbers above – those are guidelines. What can you truly afford? Look at your budget. Plug in the numbers. How do you feel about the large mortgage payment?

If you already have a lot of debt and adding a mortgage payment to it seems overwhelming, pay down your debt. But, if you have minimal debt or you can handle the payments, save for the down payment. You’ll have more equity in your home and earn a greater return on your investment.

No Two People Will Have the Same Answer

Paying down debt or saving for a down payment is a personal decision. What are you comfortable with? Remember, taking on a mortgage payment is a big responsibility – one that lasts for the next 30 years, possibly.

If you feel better making a large down payment, then save for it. If you don’t mind borrowing a large percentage of the sales price, get out of debt. Your mortgage interest rate will likely be much lower than any interest rate you pay on consumer debt. Get yourself out of it and stay out of it as long as you can.

If you can find the perfect balance between paying debt down/off and saving for a down payment, it’s ideal. You can have equity in your home, not feel overwhelmed with the monthly payments, and get the best of both worlds.

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When is Private Mortgage Insurance Required?

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If you qualify for conventional financing, but you put less than 20% down on the home, you’ll pay Private Mortgage Insurance. It’s a cost that has many would-be-buyers shuddering and it makes some avoid taking out the loan altogether.

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Is PMI as bad as people make it seem? It has its good and bad sides – keep reading to see how it may affect you.

The Benefits of Private Mortgage Insurance

PMI is an extra charge every month, but there are certain benefits that it does allow:

  • You don’t need a large down payment – You can get a loan with as little as 5% down in some cases. Of course, you have to qualify with your credit score and debt ratio to prove that you can afford the loan, but if you qualify, the PMI helps you. The PMI helps lenders know that they will still receive most of the money that you borrowed even if you default. That extra charge every month gives you the boost you need for approval.
  • You can buy a home sooner – Without the need to save for a 20% down payment, you can likely become a homeowner much sooner than if you needed 20% down on the home. Let’s say you wanted to buy a $200,000 home, a 20% down payment would be $40,000. If you only needed a 5% down payment, you’d only need a down payment of $10,000. Chances are that it is a lot easier to save $10,000 than $40,000.
  • You can request lender paid PMI – If you don’t want the extra charge on your mortgage payment each month, you can ask for lender paid PMI. The lender will pay the total cost of the loan’s PMI upfront for you. In exchange, they charge you a slightly higher interest rate. If the extra interest charges are less than what the PMI would cost, it may make sense for you to do so.
  • You can cancel PMI – You don’t have to pay PMI forever, unlike FHA and USDA loans. You can request cancellation of the insurance once you owe less than 80% of the home’s value. You have to request the cancellation, which means keeping tracking of your home’s appreciation and your outstanding principal balance. You can request cancellation in writing. If you don’t cancel at that point, the lender must cancel it automatically once you owe less than 78% of the home’s original value.

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The Downsides of Private Mortgage Insurance

There are downsides of PMI that you should know about just to make sure it’s right for you:

  • PMI raises your debt-to-income ratio – You pay PMI on a monthly basis, which means it makes your mortgage payment higher. This makes your housing ratio and total debt ratio higher. Conventional loans allow a 28% housing ratio and 36% total debt ratio. If you are near that before the PMI, the Private Mortgage Insurance may set you over the limit.
  • You can’t count on your home appreciating – The housing crisis taught us that home values could drop fast. If you count on canceling the PMI in a few short years, yet your home’s value drops, you won’t be able to cancel it.
  • It’s an added expense – If you look at the big picture, Private Mortgage Insurance can cost you thousands of dollars on top of the actual cost of the home. Even if PMI costs you an extra $50 a month and you pay it for 10 years, that’s an extra $6,000 that you won’t see again. You don’t get reimbursed for the insurance premiums that you pay.
  • The insurance is for the lender – Even though you pay the premiums for the insurance, it protects the lender. If something happens to your home or you can’t make the payments, it’s the lender that has coverage, not you. The only coverage you have is your homeowner’s insurance, which covers you in the event of a disaster that occurs to physically harm the home.

Private Mortgage Insurance has good and bad sides. Generally, it helps buyers afford the home that they want/need. Before you accept PMI, make sure you explore all of your options. Ask about the actual cost of the PMI as well. Each buyer pays a different amount as it’s based on your LTV and credit score.

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What are the Requirements for First-Time Home Buyer Programs?

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Many loan programs are only for a first-time homebuyer. Does that mean only those that have never owned a home? It may shock you to hear that the answer is ‘no.’ There are other stipulations that can make you a first-time homebuyer and therefore eligible for a variety of great programs.

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The True First-Time Homebuyer

Of course, the true first-time homebuyer is the person that never owned a home before. Maybe you rented or you lived with your parents. Whatever the case may be, you never signed on the dotted line on a mortgage.

First-time homebuyers typically have a hard time coming up with a large down payment. Because they don’t have a home with equity to sell, they have to rely on their savings. This is why many programs cater to the ‘true’ first-time homebuyer because they need help with the down payment.

The ‘Other’ First-Time Homebuyer

There are first-time homebuyers that have owned a home before. It sounds strange, but it’s the homeowners that owned a home before and now they don’t. Typically, you have to be without a home that you own for three years in order for loan programs to consider you a first-time homebuyer again.’

The borrowers that typically fit this mold are those that either sold their home for one reason or another and now rent or those that lost their home in foreclosure. Whatever the case may be, if you don’t have a home now and you haven’t owned one for three years, you may qualify for the first-time homebuyer benefits.

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Divorced First-Time Homebuyers

If you were married before but aren’t now, you may qualify as a first-time homebuyer. Here’s how. Did your spouse own the home before you got married? Or did your spouse buy the home in his name only even after you were married? If you didn’t sign your name on the dotted line on the mortgage, you may qualify as a first-time homebuyer.

Qualifying for Loan Programs as a First-Time Homebuyer

Before you start applying for loan programs, whether you are a first-time homebuyer or not, you should know how to maximize your chances of approval:

  • Maximize your credit score – Government-backed loan programs have low credit score requirements, but that doesn’t mean you shouldn’t try to increase your score. The higher the credit score you offer a lender, the better terms you’ll get. Try to achieve the highest score possible so that you can obtain those great terms.
  • Save as much money as you can – You’ll need some type of down payment unless you qualify for VA or USDA financing. The more money that you have to put down on the home, the better your chances of approval becomes. Even if you don’t put all of the money you saved down on the home, it puts you in a good light with the lender if you have reserves on hand.
  • Keep your debts down – Lenders don’t like you to have other debts. You need to try to pay off as many debts as possible. This way your income compared to your debts is low enough for lenders to feel comfortable giving you a new mortgage.
  • Have stable employment/income – You may not need a 2-year history at the same job anymore, but any consistency that you can show a lender, the better your chances of approval become. Lenders want to see that you are at least working in the same industry and have income that is either stable or rising over the years.

First-time homebuyers have many loan options available to them. If you want to apply for special programs or grants for first-time homebuyers, you’ll need to be an actual first-time buyer or one that hasn’t owned a home in at least three years. If you don’t qualify as the first-time buyer, there are plenty of other government-backed and conventional loan programs that you can use as well.

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What Upgrades and Renovations Reliably Increase Home Value?

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Not all home renovations provide a decent return on your investment. In fact, some investments that cost thousands of dollars give very little return back to the homeowner. Before you jump in headfirst and make renovations to increase your home’s value, learn which renovations will actually increase your home’s value.

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Paint the Interior or Exterior of the Home

Paint is inexpensive, yet it can add tremendous value to your home. Inside, paint can give a home that warm, cozy feeling. Just by switching the paint colors, you can transform a room from boring to amazing. Whether you have a home with old, peeling paint or the paint is just outdated and needs a fresh coat, it can add tremendous value to your home

Exterior paint can have the same effect. The exterior of your home offers the first impression of your home for many people. If the paint looks faded and worn, it may turn people off. A fresh coat of paint can bring the house back to life, making it look newer and brighter, again for only a small investment, which you’ll see, reflected in your home’s new value.

Fix Up the Kitchen or Bathroom

Kitchens and bathrooms get the most use and therefore have the greatest return on their value when renovating them. Luckily, you don’t have to do major renovations to either room to see a good return on your investment.

Minor renovations in the kitchen and bathroom include refinishing the cabinets, replacing the appliances, or changing the flooring. These changes, whether you choose one or all, typically return at least 80 percent of your investment.

A few other ways to moderately renovate a kitchen or bathroom include changing out the faucets or lighting and repainting either room. What you get when you are done are two rooms with great function and new beauty. Having updated kitchens and bathrooms also help you sell your home faster, as they are the two areas most buyers look at first.

Update the Curb Appeal

Many people focus on interior renovations when fixing up a home, overlooking one simple change they can make outdoors – updating the curb appeal. Making your home look impressive from the outside doesn’t require extensive work or a lot of money, though. Simple changes like adding some landscaping, trimming the grass and bushes, and fixing any broken shutters, gutters, or fencing all increase the value of your home.

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Buyers use your curb appeal to determine what the inside of your home looks like before even stepping inside it. If the outside of the home is well kept, passerby assumes that the inside is just as immaculate. If the outside looks trashed and overgrown, it gives a bad vibe regarding the inside too.

Update the Flooring

Changing the flooring can increase your home’s value too. Even though it’s not something you probably notice right away, since the human eye naturally looks up, flooring is important.

If you have torn carpet, damaged wood floors, or torn linoleum, new floors can add tremendous value to your home. If you can afford it, go for the wood floors, as they add the most value. If you don’t prefer wood floors or it’s not in your budget, ceramic or linoleum work well too.

Make Energy Efficient Changes

Buyers love energy efficiency in homes. If you change out the appliances, add solar panels, or the utilities with energy efficient options, you’ll see an increase in your home’s value. Today, consumers want everything energy efficient. It helps reduce the wear and tear on your appliances and utilities and it helps reduce your utility bills.

Small home improvement projects can have a major effect on your home’s value. If you want to increase your home’s resale value, consider any of the above changes. We also recommend talking to a local real estate agent or appraiser before making any renovations to your home to see what people in the area want to see. The professionals working in your area see firsthand how people react to freshly painted walls, energy efficient appliances, and updated flooring, giving you the best chance at increasing your home’s value.

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What are the Disadvantages of Seller Paying a Buyer’s Closing Costs?

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If you find yourself coming up short on your closing costs, you may ask the seller for assistance. The seller paying the closing costs is common and is even acceptable in many loan programs. However, it may not be the right choice for everyone. Before you jump at the chance to have help with your closing costs, learn the disadvantages of doing so in order to make the right decision.

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The Seller Isn’t Really Paying the Costs

While it seems like the seller is doing you a tremendous favor by crediting you thousands of dollars at the closing, they truly aren’t paying the fees for you.

When you look closely at the process of the seller paying the closing costs, you’ll see that when you ask the seller for help, he or she agrees to in exchange for a higher sales price. In other words, the seller makes the same amount of money on the sale whether he pays your closing costs or not. When you agree to the higher sales price, you end up taking a higher loan amount. This results in a higher monthly payment, more interest, and more money out of your pocket in the end.

The Appraisal Could be an Issue

If you raise the selling price of the home, the home must appraise for that amount. Anyone could increase the asking price of a home and give seller concessions, but if the market data doesn’t support the value, a lender won’t allow the higher sales price.

If the appraisal comes in lower than the sales price, it puts you right back in the same position. You can either:

  • Walk away from the sale. This is often the best idea since who wants to pay more for a home than it’s worth, right?
  • Pay the difference in cash. If you didn’t have the cash to cover your closing costs, you probably don’t have the cash to pay the difference, so this probably isn’t an option.
  • Negotiate a lower sales price. If you still need help with the closing costs, your seller may not want to lower the price, which could leave you back at square one – walking away from the sale.

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The Real Estate Commission Increases

While you don’t technically pay the real estate commission (the seller does), it still affects the bottom line. If you raise the asking price of the home in order for the seller to cover your closing costs, the seller has to pay a higher commission to the real estate agent.

Many real estate agents make between 3% and 5% of the sales price of the home. While 5% on even $5,000 is only $250, it’s still another higher expense the seller and in return, you have to pay for the home. Plus with the seller paying the closing costs, it’s more money out of the seller’s pocket right away.

You May Have Mortgage Approval Issues

Each loan program has different allowances for seller concessions. The FHA and USDA loan allow up to 6% of the sales price in seller concessions. But conventional loans allow different amounts depending on your down payment. For example, if you put down less than 10%, the seller can only give you up to 3% in seller concessions. If you put between 10% and 25% down on the home, the seller can give you 6% back and if you put down more than 25%, the seller can give you as much as 9% back in seller concessions.

Just because the mortgage program allows it, though, doesn’t mean the lender has to approve it. Each lender has their own rules regarding what they’ll accept. You may find lenders that don’t approve of seller concessions or if they do, they limit what sellers can give you. This could make it harder to get your loan approval.

Having the seller paying the closing costs has its pros and cons. Make sure you look at both sides before deciding what to do. The biggest issue is the larger amount that the closing costs will cost you in the end. With the interest on the loan for a possibility of 30 years, you could greatly increase the amount you pay for that ‘assistance.’

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Should You Use Your 401(k) for Down Payment?

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If you don’t have money to put down on a home, but you have a sizeable 401K account at work, you may consider using that money for your down payment. While you probably know that withdrawing the funds prior to retirement results in a penalty and taxes, there is a way around it. You may be able to borrow the money from your 401K to purchase a home.

Keep reading to learn how this might work.

Borrowing Money From Yourself

Essentially, when you borrow money from your 401K, you borrow money from yourself. Keep in mind that this is a loan with interest and due dates. The difference between a 401K loan and withdrawal is the penalties and taxes. When you borrow the money, you don’t pay penalties or taxes. When you withdraw funds, you do, but you don’t pay the funds back.

Before you start, though, you’ll have to make sure that your employer allows 401K loans. Most employers do, but some don’t. In general, most companies allow you to borrow up to 50% of your vested balance. So if you have $50,000 fully vested according to the company’s terms, you could borrow up to $25,000 for a down payment.

Paying the Loan Back

Just like any other loan, you must pay the 401K loan back in full. Because each company has different rules, you should check with your plan sponsor to see the exact terms of your loan. Typically, you have up to five years to pay the loan back (plus interest). If you leave the company (either voluntarily or involuntarily), you have a short amount of time to pay the loan back in full (typically 60 – 90 days).

The amount you pay back will include interest. Typically, you pay 2 points more than the current prime rate in interest. This interest doesn’t go to a bank though; it goes directly into your 401K account. Consider it the funds to make up for the money you would have made had you left the funds in your account to grow.

Does the 401K Loan Affect Your Debt Ratio?

A large part of your mortgage application is your debt ratio. This is a measure of your current debts to your gross monthly income. Lenders look at debts like your installment loans, mortgages, and credit card loans. If you borrow the money from your 401K loan, though, they will need to include that payment as well since it’s a debt you have to pay back.

If your debt ratio isn’t close to the maximum allowed for each loan program, you may not have anything to worry about. However, if your DTI is close to the maximum allowed, the 401K loan might put you over the edge, making it harder to get approved.

Is it Smart to Use Your 401K?

Even if you know you can borrow from your 401K account, is it right to do so? Some people have no problem borrowing from themselves, knowing that the interest they are paying is going right to them and not to a bank. But, there are some things you may want to consider before doing so.

First, ask yourself, do you need the down payment? If you have no money of your own for the down payment, you may not have a choice but to borrow from your 401K unless you are eligible for a 0% down payment loan, such as the USDA or VA loan. If you have some money, though, and it meets the minimum requirements for the loan program, you may want to leave your 401K alone.

You should also consider your other options, even if you don’t have any money to put down on the home. Have you exhausted any gift options or looked at down payment assistance programs in your area? If you haven’t, you should consider exhausting all available options to you so that you can leave your 401K alone if possible.

While a 401K loan is possible, it shouldn’t be your first option. Make sure you look at all other options to determine if you can get the money you need for a down payment elsewhere. If you can’t and you need the 401K loan, make sure you understand the terms and the maturity date so that you can make good on the loan.

Is an Economic Recession a Good Time to Buy a House?

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The Housing Crisis of 2008 had long-lasting effects on homeowners. It took almost a decade to see changes in home values or at least worthwhile changes. Now there’s the coronavirus pandemic and we’re in another recession, but this time it’s different.

We aren’t dealing with rock-bottom housing prices or mortgage lenders facing repeated losses due to a multitude of foreclosures. While millions of Americans are out of a job still, the housing market hasn’t nosedived yet.

But since we’re in the midst of the recession, now may be a great time to buy a home, here’s why.

Looking for Current Mortgage Interest Rates? Click Here.

Low Interest Rates

We can’t love coronavirus for the toll it took on many lives, but it lowered interest rates. If there’s a silver lining, there it is.

Interest rates are the lowest they’ve been since the housing crisis. If you’re waiting for the ‘perfect payment,’ you may get it now. While the Fed keeps its rates low to keep money moving in the economy, it’s a great time to take advantage of mortgage rates and buy a home.

Choose a fixed rate loan to have that rate locked in and you don’t have to worry about what happens in the next few years.

Click to See the Latest Mortgage Rates.

Lower Housing Prices

Anyone selling their home now needs to move. They aren’t doing it because they want to size up or moving just for the fun of it. They either can’t afford the mortgage, but don’t want a foreclosure or their job moved them.

Either way, sellers are motivated, which makes them more likely to negotiate.  While you can’t steal the homes, you may pay much lower prices than during a regular economy.

Sellers Give More

Motivated sellers provide more help. If you want the window treatments or furniture included, sellers may oblige. If you need closing cost assistance or can’t close for 60 days, sellers may agree. They know buyers are scarce, so they won’t run you off by saying no to your demands.

Less Competition

Even with low rates, many buyers can’t get a loan. Many potential buyers don’t have the down payment or don’t have a job so they can’t borrow money. This means fewer buyers in the market. With fewer buyers bidding for the same home, you get what you want without hassle.

Homes Sit Longer

Recessions make qualifying for a mortgage hard. If buyers can’t get financing, homes don’t sell. The longer homes sit on the market, the more desperate sellers get. If a home sits long enough, sellers may lower the asking price before you even bid. Once you find the home and negotiate, you get quite the deal on the home.

Watch out When Buying a Home During a Recession

Buying a home during a recession has many benefits, but there are downsides.

  • What happens if you lose your job? No job is 100% secure, especially during a recession. Even with the best deal, if you don’t have a job, a mortgage may be unaffordable. Now you put yourself at risk of foreclosure.
  • Banks get tougher. Recessions affect banks too. They won’t lend to just anyone. Lenders make sure you can afford the loan. They may require you to have liquid assets in an emergency fund too. They have to protect themselves from loss.
  • Investors may be lurking. Recession prices are an investor’s goldmine. Buying homes at rock bottom prices and selling them for a lot more when the economy improves is the perfect recipe for investors. With more buyers in the market, competition increases.

Buying a home during a recession may have a great outcome. Do your homework like you would during any economy. Check the loan’s affordability, the home’s historic values, and make sure you love the neighborhood. A home is one of the largest investments you’ll make in your life; enter the transaction with caution for the best results.

Click Here to Get Matched With a Lender.