What Maybe Used as a Down Payment?

Understanding what can be used for a down payment is essential when buying a home. While many buyers assume they can only use their savings, there are actually several other options available. Utilizing a down payment calculator can help clarify your options.

Using Retirement Funds

Many people overlook their retirement funds when considering a down payment due to potential early withdrawal fees. However, as a first-time homebuyer (someone who hasn’t purchased a principal residence in the past 3 years), you can use funds from your IRA or 401(k) for your down payment.

• IRA Withdrawals: You may be able to withdraw up to $10,000 from your IRA without penalties if you’re a first-time buyer. While you might avoid early withdrawal penalties, you will still need to pay income tax on the amount.
• 401(k) Withdrawals: For 401(k) accounts, you generally have two options: borrowing the money or taking a hardship withdrawal. Loans from a 401(k) must be repaid with interest, while hardship withdrawals might be subject to penalties unless you qualify for an exemption.

Using Securities Accounts

If you have equities or bonds, you can liquidate some of these assets to fund your down payment. This can be an effective strategy, though it’s important to consider the future gains you might forgo by selling these securities. Alternatively, you could take out a loan against your securities but be mindful of capital gains taxes.

Using Proceeds from a Home Sale

For those who are not first-time buyers, proceeds from selling another home can be used for a down payment. If you’re involved in a 1031 exchange, which allows you to trade one investment property for another and defer taxes, you can use the proceeds from the sale of an investment property. If the property was not an investment, you can still use the sale proceeds, but be prepared for potential property tax implications.

Using Gifts

Gifts can also be used for down payments, but specific rules vary by lender. For standard FHA or FHA 203(b) loans, you can receive a gift up to a certain amount from family members, including in-laws. The gift must be documented with a letter. Some lenders may require you to contribute a portion of the down payment yourself.

Life Insurance and Inheritance

Funds from a life insurance payout or inheritance can be used for a down payment. You may also borrow against your life insurance policy, though not all lenders accept borrowed funds. Ensure these assets are considered in your mortgage application.

Tax Refunds

Tax refunds are considered your money and can be used for a down payment in the same way as savings.

Down Payment Assistance and Grants

Various down payment assistance programs can help, especially if your own resources are limited. These programs are often available to first-time buyers but can also assist previous homeowners. Assistance may come in the form of grants or zero-interest loans, making it easier to manage the costs of buying a home.

By exploring these options, you can find the most suitable source for your down payment and potentially ease the home buying process.