Owning a home is achieving the American dream. With good credit and a low debt-to-income ratio, you are on your way to mortgage approval. Unfortunately, there is another costly requirement you must meet. At the time of publication, most lenders desire a down payment equal to 20 percent of the home's price. Saving up for a down payment is often the most difficult part of the homebuying process. The lack of a down payment does not have to crush your ownership dreams.
Withdrawal From Your IRA
In most cases, you are required to wait until reaching age 59 1/2 before you can withdraw funds from an IRA without facing a tax penalty. However, the Internal Revenue Service makes an exception for first-time homebuyers. You are allowed to withdraw up to $10,000 towards the purchase of your home. If you are married and both tap into your IRA, that's $20,000 towards the down payment.
Borrow From Your 401(k)
Funds in a 401(k) are typically reserved for retirement. As with an IRA, the IRS makes an exception when you want to purchase a home. The home does not need to be your first home, but it must be your primary residence. If you choose to withdraw from your 401(k), you will need to pay it back along with interest. Basically, you are loaning yourself the funds. All interest payments are deposited back into your 401(k). Funds obtained from a loan are not subject to income tax or the IRS early withdrawal penalty, unless you default on the loan. Although 401(k) loans are allowed under law, the employer is not required to offer loans, so you'll need to check with your employer before counting on a loan from your 401(k).
If you don't have a retirement or investment account to borrow down payment funds from, explore assistance options for first-time homebuyers. A variety of state, county and city programs can assist qualified borrowers with getting funds. For instance, the California Housing Finance Agency features a statewide down payment assistance program. The California Homebuyer's Down Payment Assistance Program provides qualified borrowers a deferred-payment secondary loan equal to 3 percent of the purchase price or the appraised value, whichever is less. The Florida Housing Finance Corp. offers a variety of loan programs including help for low income borrowers and community heroes. Military personnel, school system employees, firefighters, law enforcement officers and certain health care workers fall under the hero category.
FHA loans are guaranteed by the federal government and designed to offer a low down payment loan option for buyers. An FHA loan only requires you to come up with 3.5 percent of the home's price. Most local down payment assistance programs also require you to use an FHA loan for financing.