What funds can be used for a down payment?

Buying a home is a huge milestone but saving for a down payment – that can feel like a major hurdle. The good news? There are several ways to make that down payment happen, whether through savings, family gifts, 401(k) withdrawals, or even second mortgages. Understanding your options is key, and we’re here to help you explore what’s possible. So, let’s unpack the different ways you can fund your down payment.

Many homebuyers rely on gifted money to help cover their down payment, and that’s totally OK! But before you start collecting checks, it’s important to know where the money can come from and what the rules are.

In most cases, the gift needs to come from:

• Immediate family members: Parents, siblings, and grandparents can gift money toward your down payment.
• Relatives by marriage: In-laws can sometimes help out, too.
• Legal guardians or close friends: As long as it’s appropriately documented, these individuals can give you a hand with the down payment.

Lenders will want proof that the money is truly a gift and not something you’ll need to pay back later. That means the person gifting the money might have to write a letter confirming that it’s a gift with no strings attached. Keep in mind that each loan program has its own rules about who can gift money, so be sure to check with your mortgage loan lender.

Thinking about using your 401(k) to fund a down payment*? It’s possible, and there are a couple of ways to go about it, both with pros and cons.

• 401(k) Loan: You can typically borrow up to $50,000 or 50% of your vested balance (whichever is less). The good news is you’re borrowing from yourself, and you’ll repay the loan over five years—with interest.
• 401(k) Early Withdrawal: You can also withdraw the money, but here’s the catch – if you’re under 59 ½, you’ll likely face a 10% penalty, plus income taxes on what you withdraw.

While tapping into your 401(k) gives you quick access to cash, it’s important to remember that it could affect your retirement savings down the line. Make sure it’s the right move for your financial future before committing.

Yes, you can. Some homebuyers take out a second mortgage to cover their down payment. If you’ve built up equity in your current home, you can use that equity as a down payment on a new property. This approach might not be very common, but it’s a good option for those who already have significant equity and don’t want to dip into their savings.

Just remember, managing two mortgages requires some serious planning. It’s not something to rush into, but if it works for your situation, it can help you keep your savings intact while securing a new home.

For first-time homebuyers or those with limited savings, down payment assistance programs can provide valuable financial support. These programs, often offered by state and local governments, are designed to help buyers who may struggle to afford a down payment on their own.

One common form of assistance is known as a “forgivable second mortgage.” While it’s structured similarly to a second mortgage, this loan is different from traditional second mortgages because it doesn’t require existing equity in a property. In fact, first-time homebuyers can qualify for this assistance even if they haven’t owned a home before.

Here’s how it works: The program gives you a loan to help cover your down payment, and if you meet certain conditions–such as living in the home for a set number of years–the loan may be forgiven, meaning you don’t have to repay it. This makes it an attractive option for first-time buyers who might otherwise struggle to gather the full down payment amount.

These programs are typically aimed at:

• First-time homebuyers
• Low-to-moderate income families
• Buyers in certain geographic areas, often targeted for revitalization

It’s worth exploring the various assistance programs available in your area to see if you qualify for a forgivable second mortgage. This can be a great way to reduce the financial burden of homeownership without taking on additional debt.

Beyond gifts, 401(k) funds, and second mortgages, there are other common ways to secure your down payment:

• Personal savings: The classic option. Using your personal savings gives you full control, and no repayment or taxes are involved.
• Trust funds: If you’re fortunate enough to have access to a trust fund, it can be a great way to cover your down payment without needing to repay the money.
• Sale of investments: If you have investments like stocks or bonds, selling them for a down payment is another option. Just remember to factor in any capital gains taxes, and consider what selling those investments might mean for your long-term financial goals.