Using 401(k) for Down Payment

Worried about down payment on your first home?  You may be able to tap into your 401(k) for your down payment. NOW is the perfect time to buy a house so it might be worth to touch your retirement money earlier than planned.

 

You can generally borrow up to half of your balance, up to a maximum of $50,000, from the account at any age and for any reason without tax or penalty.  The interest you pay on the loan, generally the prime rate plus one or two percentage points, goes back into your account.

 

Loans taken from 401(k)s must be paid within 5 years, but your employer may give you up to 15 years to repay a 401(k) loan if you are using the money to buy a home.  

 

There is one down side to borrowing from your 401(k). If you lose or leave your job, you generally have just 60 or 90 days to pay back the loan or it will be subjected to taxes, plus a 10% early withdrawal penalty if you're under 55 when you leave 

your job. (Source:www.realestate.msn.com)

 

In principle, it's not a good idea to tap into your retirement funds, since you'll need those funds when you get old.  But, borrowing from 401(k) can be the quickest, simplest, lowest-cost way to get the funds you need. Requesting for a 401(k) doesn't require credit checks and it doesn't affect your credit rating.  Getting your 401(k) loan can be just few clicks away and you can have your check on hand within a few days. 

In addition to that, it's easy to repay your loan. You can pay your loan earlier than scheduled without prepayment penalty. You can also pay it back through payroll deductions.

 

Just like any type of loan, you should always have a clear plan of paying on time or earlier. If you have any questions on your 401(k) loan, don't hesitate to call me.

Using Down Payment Gift Money

It's very common nowadays for a first-time home buyers to receive down payment gift money.  Parents are usually the generous ones that will give their children gift money to help them start the home buying process.

The process of accepting a gift for your home down payment is not that difficult, just follow these simple rules, and the underwriter handling your case will surely grant you the loan.

1. Request for a  "Down payment Gift Letter" form from your lender 
The gift letter must be short and simple letter containing the following:

• The relationship between the home buyer and the person giving the gift.
• The amount of the gift.
• The address of the home being purchased.
• A statement that the money is a gift and not a loan that must be paid back.

Instead of downloading a sample from the Internet, request the down payment gift letter from your lender.  You'll never know what the sources might put in the letter from an Internet Download.

2. Prepare documentation
Underwriters will look for where the money came from and where it went.  In short, they want to see the proof that the money came from your parent's account and went directly into yours.

Be ready to provide the paper trail of the money coming out of their account and a proof that it was deposited to your account.  Make sure that it's the exact amount being declared in your "down payment gift letter".

Any discrepancies in the documentation will likely disqualify your use of "gift funds" entirely.

Additionally, if you will use Conventional financing, you will need to invest at least 5% of the purchase price from your own funds unless your total down payment is 20% or more.  If the down is 20% or more, then it can be called as a gift.  On the other hand, FHA does not require any cash from the buyer if down payment gift money is being used.

Most home buyers' have a difficult time coming up with the cash for a home down payment.  By using the cash gift to make a down payment for a mortgage, will give you an advantage in qualifying for a mortgage and get lower interest rate.  If you are lucky enough to receive that kind of help, just make sure you follow the correct guidelines mentioned in this article. For any questions, please don't hesitate to contact me.