Perhaps one of the biggest challenges buyers face, especially first time buyers, is coming up with enough funds for a down payment, closing costs and cash reserves. The most common source of funds is a checking or savings account. Lenders will verify the source of these funds to make sure they’re yours and coming from an acceptable source. But a checking and savings account isn’t the only place to find these funds. There are others, and some may surprise you.
Gift Funds. Getting a financial gift from an acceptable source is a way. The gift can come from a family member or a life partner. The gift funds need to be tracked from donor to the borrowers’ account. Better, the gift funds can be wired directly to the settlement agent. This method eliminates the need for bank statements showing the gift funds deposited into an account. A ‘gift letter’ is also required which shows who is providing the gift and where the funds are coming from. Lenders have stock gift letters for you to use. FHA mortgages accept gift funds as do conventional mortgages.
Sellers. Sellers are also able to provide some financial assistance. When you’re writing up your offer, your real estate agent can request the sellers to pay for some or all of your closing costs at the settlement table. All mortgage programs accept ‘seller contributions’ while different loan programs may limit how much the sellers can provide.
Lender Credit. The lender can also offer a credit to the buyer’s closing costs at the settlement table. This is accomplished by an adjustment to the interest rate for the selected mortgage program. It works like this- borrowers can select an interest rate a bit higher than what is known as a ‘par’ rate. A par rate is one where there are no discount points being paid to lower the rate. Discount points are so-called because the point, expressed as a percentage of the loan amount, discounts the rate. Conversely, raising the rate provides room for the lender to issue a credit. Lenders have no preference whether or not you pay points, it’s entirely up to you. Lenders get some interest upfront via the point or collect the interest over the life of the loan or a combination of either.
Grants. Certain locales have organizations that provide grant money directly to the borrowers. A grant is not a loan, it’s essentially free money. Grant guidelines can vary based upon a particular county or be available to a specified group. Grants are most often issued to first-time homebuyers. One note here about first time homebuyers- a first time buyer is defined as someone who has not owned a home in the previous three years. This means someone could have owned a home four years ago and still be eligible for most grant programs.
Down Payment Assistance. Like a grant, down payment assistance is primarily targeted toward first-time buyers. The apply for down payment assistance along with applying for the mortgage loan. Down payment assistance can be applied for at the same time someone is applying for a mortgage preapproval. Down payment assistance also can limit household income as they’re designed for those with income below the local median.