In the wake of losing seller assisted down payment programs, the most often asked question from potential first time home buyers is “How can we come up with the down payment”. The following are some ideas that may help :
Family Loans: FHA now allows buyers to receive loans from direct family members for their down payment funds and/or closing costs. A document is prepared for the loan file that spells out the terms of the repayment agreement and any monthly payment is included in the buyer’s debt ratio. This may be an unsecured debt or secured on the subject property.
401K Loans: Buyers may utilize loans from their 401K’s and the monthly payment is not included in the buyer’s debt ratio.
First Time Home Buyer Tax Credit: Did you know that this tax credit can indirectly help your buyers with a down payment?
Example:
1. Your buyer consults with their tax adviser and verifies they are qualified for the $7,500 first time home buyer tax credit.
2. Your buyer uses $5,000 of borrowed funds from a family member to purchase a home closing in November, ’08.
3. They file their return in early January, ‘09 and owe $700 in taxes. With the $7,500 tax credit, this means they will get a refund check for $6,800 soon after filing.
4 Upon receipt of the tax refund, they pay back the family member $5,000 and have $1,800 left over for blinds, decorating, or paying off debt.
NOTE:
· A buyers may also close a home in 2009, file their 2008 taxes immediately and use the $7,500 tax credit on their 2008 taxes, and repay a loan immediately.
· Always refer to your tax adviser to verify your qualification for the tax credit prior to purchasing a home if they you will be relying on this credit for repayment of a loan.
· If as a buyer you are using the tax credit to repay a 401K loan rather than a personal/family member loan, you should check with your 401K fund manager to understand the repayment terms. Many 401K loans do not allow early repayment.
· Although the $7,500 is called a “tax credit”, there is a repayment schedule, so always speak with a tax professional to understand the repayment terms.
City & County Grants: These programs may still be used. They were not eliminated on October 1st. The only elimination was the “seller” funded down payment programs. Pinal County still has an excellent grant program and so do many cities within Maricopa county. Income limits apply.
Sweat Equity: Some new home builders will allow a buyer to use “sweat equity” as a portion of their down payment if they are short on funds to close. This is work performed by the buyer, prior to closing, and the value of the work is documented in the lender’s file as down payment funds. The work cannot be outside of the scope of the buyer’s skill level and the builder must agree to the process. So in most cases, this type of work is limited to painting.
Example:
1. Buyer purchases a $150,000 new build and down payment requirement is 3.5% or $5,250.
2. Buyer & builder agree on “sweat equity” for interior painting. Estimated cost by appraiser is $1,500.
3. Painting is done prior to closing and buyer’s down payment requirement is reduced to $3,750
Gift Funds: As always, FHA allows for family members to gift your funds up to the full down payment and all closing costs/prepaid items. Please be aware that FHA is auditing gift funds carefully and the donor must sign a gift letter and document their source of funds. If you as a buyer is using gift funds, the lender should discuss all documentation requirements directly with the donor at the time of application to avoid any difficulties later in the process.
USDA Rural Housing Program: I have written about this before, but if the home you are looking to purchase falls in the boundaries of the USDA Rural Housing Program, then you may want to explore the possibilities of using this program with your lender as it allows for 102% financing, thus getting you into the home for zero down assuming the seller will pay for your closing costs.
I hope this brief review of options helps and as always, should you have any questions about buying or selling a home in the east valley cities of Gilbert, Chandler, Mesa and Queen Creek please drop us a line and we will help you out.