People ready to take the step into homeownership need to create a savings plan for their down payment before they even look at the first home. A down payment is a large initial payment that you make when you buy a property, and it is required for most types of mortgages, though VA and USDA loans don’t need any down payment.
Read our article on things to consider before you start your real estate search here.
In general, you will need a down payment, typically 3.5 % to 20% of the purchase price. For the average person buying a home in America, it will take about 6½ years to save for a 20 percent mortgage down payment of about $43,000 for an average home costing $216,000, according to HotPads a Zillow Group as of 2017. It is essential to know your home buying budget so that you know how much of a down payment you’ll need to save. Remember, you’ll also need cash to cover closing costs which are a separate expense from the down payment. Closing Costs usually add up to another 2% to 5% of the purchase price.
Read our article on home-buying budgets here.
Homebuyers are required to disclose the source of their down payment with records and bank statements. This disclosure is to ensure that people aren’t using borrowed money to fund their down payment. If you are using gift money for a down payment, the underwriter will need to establish that the money is a gift and not a loan. This verification is done by a gift letter, a note from the donor that says you don’t have to pay the money back.
Another way some boost a down payment fund is to use the money they have already saved in an IRA or Roth IRA. As a first-time homebuyer, you can withdraw up to $10,000 from your IRA to use as a down payment (or to help build a home) without having to pay the 10% early withdrawal penalty if you are younger than 59 ½. You’ll still have to pay regular income tax on the withdrawal from an IRA, but not from a Roth. If both you and your spouse are first-time homebuyers (and you both have IRAs), each of you can withdraw up to $10,000 without having to pay the 10% penalty tax. So, together a couple can withdraw up to $20,000. If you already own a home, you can take penalty-free withdrawals from your IRA to help any of the following people purchase a first home: your or your spouse’s child, your or your spouse’s grandchild, or your or your spouse’s parent or grandparent.
Whether you are well on your way to saving for your down payment or just starting, we can help. If you want help creating a personal savings plan for your down payment, Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.
Sources:
- https://www.valuepenguin.com/personal-loans/down-payment-loans
- https://www.quickenloans.com/blog/gift-money-down-payment
- https://www.nolo.com/legal-encyclopedia/using-ira-make-house-down-payment.html
- https://www.cnbc.com/2018/07/13/want-to-buy-a-house-this-is-how-long-youll-have-to-save.html
- https://www.rocketmortgage.com/learn/what-is-a-down-payment
This material has been prepared for informational purposes.
