On this page of my First-Time Homebuying Course, you will find some solutions that may help bridge the gap between funds you have and the funds required to finalize your home purchase.
Whether you find a home earlier than anticipated or didn't budget for closing costs, you may find yourself in a challenging situation where one or more of these solutions could be the difference between being forced to wait or finishing the purchase.
Most mortgage solutions allow funds received as a gift from immediate family. These funds may be used to help cover your down payment and/or closing costs. A non-exhaustive list of acceptable donors include a child, parent, grandparent, spouse or domestic partner, legally adopted son or daughter, foster child, brother, stepbrother, sister, stepsister, uncle, aunt, son-in-law or daughter-in-law.
When utilizing gift funds, you will need to have the donor sign a gift letter that states the funds provided are a gift without expectation of repayment. The funds may also need to be verified before they can be used in your Utah home loan or California home loan.
You may use gift funds towards your down payment and/or closing costs.
The Scott Buehler Advantage: If you choose to use me, Scott Buehler, as your Loan Officer, I'll provide you with an easy gift letter template to share with your immediate family to be filled out.
In your Real Estate Purchase Contract, sellers may include a certain amount of seller concessions in your purchase that can be used towards your closing costs.
Seller concessions are closing costs that the seller has agreed to pay for the buyer. Most loan programs specify a percentage limit for seller concessions that sellers can provide to buyers. These seller concessions are especially helpful when a buyer needs to come up with unavailable cash to complete the purchase.
An example of this, say a seller wants $300,000 and the appraisal says the value of the home is $304,000. You could negotiate a purchase price of $304,000 with $4,000 in seller concessions. In this example, you are financing based on a $304,000 purchase price, the sellers will receive $300,000 minus tax prorations, tax holdbacks and title settlement fees and you will receive $4,000 to help towards your closing costs.
This option is readily available in a buyer's market but would likely need a savvy real estate agent negotiator in a seller's market.
You may not use seller concessions towards your down payment obligation.
Important Consideration: In order for seller concessions to work in your transaction, the sellers must be willing to sell their home for less than the appraised value. If the sellers want $300,000 and the appraisal comes in at $300,000, there is $0 left for seller concessions.
Take a Higher Interest Rate for a Lender Credit
You've likely heard of buying discount points to lower your interest rate, but did you know it can go the other way as well?
One of the options available to you is to take a higher interest rate for the life of your loan to realize a lender credit. The result would be a higher mortgage payment but this option allows lenders to provide you with a lender credit based on a percentage of your loan that can be used towards your closing costs.
Use these lender credits towards your appraisal fee, title fees, prepaids and any other closing costs in your mortgage transaction.
You may not use a lender credit towards your down payment obligation.
Real Estate Agent Commission Credit
Real estate agents are allowed to give all or a portion of their commission towards closing costs. Sometimes this may occur in repair negotiations but other times, a real estate agent may offer this as an incentive for you to use them as your real estate agent representative.
There are states that do not permit commission credits but as of 2021, these are available in Utah and California.
Please speak to your real estate agent to see if this is available to help you cover your closing costs.
You may not use a real estate agent commission credit towards your down payment obligation.
Gift of Equity
Purchasing a home from immediate family? You may be in luck!
A gift of equity allows your immediately family to sell you their home for less than the appraised value. The difference between the appraised value and the sales price would then be used as a gift.
Similar to the Gift Funds section above, this would require a gift letter from your immediate family member and a Real Estate Purchase Contract that has the gift of equity verbiage written into the contract.
Here's an example of how this would work:
- Sellers want $250,000.
- Appraisal says the property is worth $300,000.
- Sellers agree to sell the home for $300,000 with a $43,000 gift of equity.
- Sellers agree to give you $7,000 towards closing costs.
- Sellers receive ($300,000 - $43,000 - $7,000) $250,000 minus tax prorations, state tax holdbacks and other title settlement fees.
- Buyers (you) enter into a Real Estate Purchase Contract for $300,000 with $43,000 to be used towards your down payment and $7,000 towards closing costs.
- Buyers (you) likely complete the home purchase with $0* cash to close!
Sellers, please consult with your CPA or tax advisor for advise on tax implications of this type of gift.
* Depends on the total loan costs. In my experience on this purchase price, there should be little to no cash to close. Please apply for a mortgage for an estimation of closing costs.
Down Payment Assistance Programs
Although most down payment assistance programs traditionally have higher loan costs and higher interest rates, these programs may help you cover the down payment when no other options are available.
If your state isn't listed above, please consider speaking to a licensed Loan Officer in your state to discover your options!
Tap Into Your IRA
This is general information not tax advice. Scott Buehler and Guild Mortgage do not offer tax advice. The below information is considered general knowledge. Please consult with your CPA or financial advisor for tax planning services.
According to the IRS Publication 590-B, you may withdraw up to 10% of your IRA balance, up to $10,000, to buy, build or rebuild a first home without an early withdrawal penalty. This can be done with a Traditional IRA or Roth IRA.
You must be a first-time homebuyer for this distribution which is defined as not having ownership interest in a property during the three-year period preceding the date of the purchase.
Please consult with your tax advisor or CPA for the tax implications or forms required to complete this type of distribution successfully.
A documented IRA distribution may be used towards your down payment and/or closing costs.
Tap Into Your 401K (with penalty)
Although this is not recommended as the benefit will not outweigh the drawbacks, the option is available for those that need it.
Some drawbacks of taking an early distribution may include:
- Added income which may increase your income tax during tax season, especially if it places you in a higher tax bracket.
- A 10% (or more) penalty for an early withdrawal.
- Inability to repay your 401K account which could lose years of tax-free earnings.
Please consult with your tax advisor or CPA for additional tax implications of an early 401K withdrawal before considering this option.
A documented 401K withdrawal may be used towards your down payment and/or closing costs.
The Value of Scott Buehler by Your Side! Hopefully these home shopping tips, resources and ideas to avoid mistakes during home shopping has really helped you in your homebuying journey! I'd be honored and excited if you chose me as your trusted mortgage consultant for your home loan. I'll happily answer any of your questions or concerns throughout the entire process.
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