Down Payment Sources
When purchasing a home, down payment requirements can be confusing and maybe a little frustrating. However, when you are clear on allowable down payment sources, the entire process becomes simpler.
Lenders will allow savings from several different sources as well as gift funds and, in some cases, cash you’ve saved at home. Down Payment requirements will vary depending on the lender you choose (i.e., FHA, Fannie Mae or Freddie Mac). The most commonly acceptable down payment sources, with all three lenders include: checking, savings, 401k, stocks, bonds, IRAs, Keogh Plans, trust accounts and the cash value of your life insurance policy.
A very popular source of down payments are gift funds. While gift funds are acceptable, lenders are very clear about who provides the gift funds. Additionally, no gifts may be received from any one person or organization who stands to gain from the sale of the property. Finally, any gifts received may only be received must be from a:
- Close Friend
- Labor Union
- Charitable Organization
- Government Agency
- Public home ownership assistance entity.
If you have very little savings, both Fannie Mae and FHA allow both the down payment and closing costs to come from gift funds. With the help from gift funds you’ll be able to focus on investing in home necessities such as appliances, furnishings or moving expenses.
In addition to gift funds, FHA and Freddie Mac offer other down payment options.
FHA’s Cash Down Payment
In addition to gift funds, FHA allows the use of cash you’ve saved outside of any banking or investment institution. While most lenders will not accept this type of cash, with the accompaniment of a letter of explanation, FHA will allow cash to be used for your down payment and closing costs.
If you plan to use cash, the amount of cash used must be consistent with your salary. For example, if you are making $50,000 per year and have saved $100,000 in just a year, FHA will want to know how you were able to save such an amount when your salary is half of what was saved.
FHA Personal Property Down Payment
When purchasing, FHA will allow funds from the sale of personal property to be used for your down payment and closing costs. Restrictions do apply, for example, an estimate of the value for those items sold must be provided along with evidence that those items were sold.
Freddie Mac’s Pooled Funds Down Payment
When purchasing a primary residence, Freddie Mac will allow the use pooled funds as a down payment. Pooled funds are defined as: savings gathered by family members who reside together and who plan to continue to live together in the newly purchased home.
Getting clear on the requirements will help move the mortgage process along smoothly. There are many creative down payment options available; be sure and ask your mortgage professional to explain all of your choices as it may be the difference between buying now or later.
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