In today’s tight credit markets, behind credit issues, the second most common reason for not being able to qualify for a mortgage loan is a lack of liquidity. This means potential borrowers do not have sufficient funds available for down payment, closing costs, and/or pre-paid interest, taxes and insurance.
Here is some good news: most closing costs, and even pre-paids, can be funded with seller contributions. Seller contributions are funds that the seller agrees to put towards the buyers closing costs as part of the purchase and sale agreement. Some mortgage programs limit these contributions to around 3% of the purchase price, but others allow up to 6% seller contributions. In many cases, if negotiated properly, all costs associated with closing can be funded by the seller.
Most conventional loans require that down payment resources come from the borrowers own funds, but government loans offer more flexibility. On an FHA loan, for instance, down payment funds can come from gifts as long as the gift is from a direct relative or other person with a demonstrated financial interest in the borrower such as a co-habituating partner or employer. It is important that these funds are truly classified as a “gift” instead of a loan as borrowed funds are generally not acceptable as a down payment source.
One exception to the borrowed funds rule is a loan on assets in a 401k plan. Borrowers are allowed to use proceeds of a loan from their retirement plan for down payment purposes as long as the repayment schedule is counted in the borrower’s debt-to-income ratio. Another little known source of funds that may be used for down payment purposes is assets in an Individual Retirement Account, or IRA. First-time homebuyers, defined by the IRS as not having owned a home in the past two years, can take up to $10,000 penalty-free from an IRA to use for a down payment. Roth IRAs would have no taxation in this case since they are funded with post-tax dollars. An interesting clause in this first-time homebuyer rule is that the homebuyer need not be the owner of the IRA. As long as the funds are used for a qualified first-time homebuyer purpose, a parent, grandparent, or other relative can use funds from their own account and gift them to their child, grandchild or other relative without the penalty.
For those borrowers with good credit scores but who fall into the low-to-moderate income thresholds established by the US Department of Housing and Urban Development, down payment assistance may be available. Keep in mind that these programs will still require some borrower contributions to cover an earnest money deposit on the sales contract as well as the cost of an appraisal and inspection. Also, funding is not always available so it is important to check with a qualified Houston mortgage lender to ensure funds availability.
One final tip if you are still tight on your down payment funds. If you anticipate receiving a refund on your 2011 tax return, you should file as soon as possible in January. The sooner your return is received and processed by the IRS, the sooner you will receive your refund from the IRS which can be used toward your down payment!
While the overwhelming majority of “no money down” programs left the mortgage financing landscape years ago, borrowers can still obtain mortgage financing without breaking the bank using some of the strategies outlined here.