Hey, Millennials: You can get a down payment together
From Sindeo, June 16, 2015:
The Millennial generation has pretty much been sitting on the sidelines of home ownership since the housing market slowed down in 2008. And no wonder – you and your friends are more likely to have big student loans and entered a struggling job market than the generations that came before. But you still want to own a home someday.
There’s no guarantee you’re going to hit the lottery and only a slim chance the oil painting you bought at the flea market is worth more than the frame. It might seem hopeless, but if you’re savvy and build a solid plan, you can get to “someday”… before old age sets in!
The biggest obstacle to homeownership is having enough money to make the down payment on your mortgage. To get a typical 30‑year fixed‑rate mortgage without paying mortgage insurance, you need a 20% down payment. The median home price in the U.S. is about $220,000. So 20 percent of that is $44,000.
It’s not just lenders that like to see you that have that much cash. If you make an offer on a house, the seller will also take a close look at how you plan on paying for the house before they agree to sell. If you’re in a competitive housing market – and most metro regions have rebounded and are getting hotter – you can often win out over another bid by having stronger financials than the other buyer. One of the factors that will be taken into account is whether you can put more cash toward the transaction than a competitor.
So how do you get that down payment? If you’re looking at a long‑term strategy, there’s plenty of advice out there that will pad your savings account. But here’s a shortcut to getting your down payment for your first house while interest rates are still at historic lows.
Tried and true
The Bank of Mom & Dad is a trusted resource for many first‑time homebuyers. Recent surveys say half of the adults looking to buy a house soon plan to ask their parents or grandparents for financial help with the down payment.
But this is a little more complicated than other times they’ve helped you out. Be clear about whether this is a loan or a gift. If it’s a gift, the limit is $13,000 before the giver has to pay tax on the amount.
If it’s a loan, all parties should put the amount, terms and payment plan — with interest – in writing. That will help avoid the gift tax if it exceeds $13,000. Call your accountant (or your parents’ accountant) to work it out with professional help. And once that loan is made, stick to the payment plan!
See what you’ve got
If you’re searching around for ways to fund your down payment, your savings account may not be exactly flush. But you probably have other financial resources. If you’ve got an IRA, for example, you can tap that to get some cash in hand. There’s a first‑time homebuyer exemption that allows you to use up to $10,000 in IRA funds without the 10 percent early withdrawal penalty. If you’re married, your spouse can do the same, so you’ll end up with $20,000. Keep in mind, though, that while you won’t pay a penalty, you will have to pay income tax on that amount.
If you’ve got a Roth IRA and have had it for longer than five years, you can make a withdrawal without paying taxes on it.
A lower down payment option
Maybe you can’t – or don’t want to – ask your parents for help or tap into your retirement funds. But you still want to buy a house, especially with interest rates so low. There’s a new way to get around that.
There are traditional paths like an FHA loan, but the property you buy has to conform to some strict guidelines. If you’d like more freedom in what type of home you buy, there’s a new option.
You can get a conventional 30‑year mortgage without having a 20 percent down payment. Fannie Mae and Freddie Mac announced in December 2014 they will start backing mortgages with as little as 3 percent down payment on the home’s price. Though the rules about the house you want to buy aren’t as rigid, you will have to buy private mortgage insurance (that goes for any loan under 20 percent down, though), have a credit score of at least 620, and provide complete documentation of your income, assets and job status. You’ll also be required to receive home ownership counseling.
First-time homebuyer assistance
There are other ways to fund your down payment, but you’ll need to do a little homework. If you were in the military, you’re eligible for a VA loan. VA loans require no down payment.
Many states and counties have programs in place to help first-time buyers that can help you with meeting the down payment requirements. However, understand there may be restrictions on where you can buy – many programs are aimed at stabilizing and revitalizing neighborhoods by bringing in new homeowners. If you’re cool with the neighborhood, this can be a great option for owning a home with a smaller down payment.