Loans
Taking a loan from your employer retirement plan to use toward your home purchase has two potential benefits. The first is that you can get this money at a relatively low rate. You will mostly likely be paying yourself back the principal and interest on the loan, and in effect paying no interest.
The second benefit is that, as opposed to taking a withdrawal, loan money has no taxation, as long as you pay it back on time.
The challenge with it, if there is one, is that the repayment of the loan will be calculated into your debt to income ratios. Depending on your income, this may have little or no impact on your being able to qualify.
Withdrawals
There are two potential withdrawals that you can take from your retirement plan. One is called a regular withdrawal, the other is a hardship withdrawal.
The regular withdrawal is as it sounds. You take money from the plan, and there are no questions asked as to what you are going to do with it, and no documentation is required.
The hardship withdrawal is a special type of withdrawal that allows you to take money from the plan for a specific reason, one of which is the purchase of a home.
Hardship withdrawals, in the eyes of the IRS, who oversee these, are the means of last resort. This means that if you take one, you must have exhausted all other resources within the plan to get money, including loans and regular withdrawals.
In order to get a hardship withdrawal though, unlike a regular withdrawal, you must provide documentation to the retirement plan, including a sales contract that has been signed by both sides of the transaction, and a Good Faith Estimate showing what funds you need to have at closing.
Regardless of the type of withdrawal, the money you remove from the plan may be considered taxable income. This will depend on how the money was put into the plan. If it went in on a pre-tax basis, it will be taxed in the course of the withdrawal.
If you are under the age of 59 , you may also face an additional, IRS penalty of 10%. Check with your tax advisor for more details.
Gifts of Assets
If you are planning on receiving financial help from a close relative such as a parent, or another person related by blood or marriage, you are able to do that. The donor of the funds must provide two things:
A Gift Letter. Your lender will provide you with a form, stating that this is a gift from the donor, for the purchase of the specific property, and, there is no expectation of repayment. This will be signed by the donor.
Proof that the donor in fact has the money to give. This can be done through a bank statement showing that the gifted money has been in that account for at least two months.
Lenders like Maureen Martin, get highly suspect when large deposits are made shortly before donors provide the funds to borrowers. If, for confidentiality purposes, the donor is unwilling to do this, they can get a letter, signed by a bank official stating that the money is legitimately in there.
Seller and Lender Credits
Seller credits, or concessions as they may also be called, are financial incentives that will help offset some of the closing costs that buyers pay when purchasing a home. Sellers will offer these as a way to entice you to purchase their property, especially when they are having challenges selling it.
Lender credits are just as they sound. They are credits from the lender to also help offset closing costs and reserve requirements.
Lenders, for example, knowing that you may have less money than you need to put into the transaction will offer you a slightly higher interest rate, but give you a significant credit, to reduce the amount of money you will need at the closing table.
Keep in mind that neither seller nor lender credits may ever be used toward your down payment.
Allowable Seller Credits
Conventional mortgages allow you to receive a seller credit for up to 3% of the purchase price if you are putting 10% or less down. If you are putting down more than 10%, you may get a 6% credit.
For FHA, you are able to receive 6% of the purchase price in seller credit.
On a VA loan, you are able to receive up to 4% of the purchase price in seller credit.
Down Payment Assistance Programs
Down payment assistance will come from one of two places. They are:
Government Assistance Programs. These can be at the state, county and city levels, and vary from area to area. To qualify for these, you normally need to be below some predetermined income level. These programs are mostly for the really needy, and an average buyer will often make too much money to be able to qualify.
These government programs may work in one of several ways:
They will be grants, meaning no repayment is expected.
They will offer a no or low interest loan on the funds they are providing.
They will give you the money, provided you stay in the property for a specific period of time.
Charitable Organizations. These organizations must meet certain criteria, such as having a non-profit status to be able to provide you with down payment assistance.
What Wouldn’t be Considered Assets?
Cars
Motorcycles
Boats
Jewelry
These items of course have value, and if needed, could probably be sold to make the house payment, but lenders though don’t see it this way, so they would unable to be on the mortgage application.
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