An important step in purchasing is home is determining how much of a down payment you’ll make, and from what sources the down payment and other costs will come. For accurate answers to these questions, a current inventory of your assets is crucial. Begin by gathering all financial statements for all your assets. You may not plan to liquidate all assets, but a complete accounting is important. The assets you keep can serve as collateral for a loan and as reserves which may be required by your lender. If you’re going to receive a gift from a relative, try to obtain a letter stating the amount of the gift.
You may be able to borrow from your 401(k) without any tax penalties. If you liquidate your 401(k) or IRA, there may be tax implications. Consult with your tax advisor before liquidating any assets. If you own stock you want to keep, consider borrowing against it with a margin loan. Consult with your stock broker regarding this option.
This worksheet may help you inventory your assets.
Checking Accounts: __________________
Savings Accounts: __________________
Mutual Funds: __________________
Other Securities: __________________
Retirement Funds (401K, IRA, etc): __________________
Gifts from relatives: __________________
Total Cash Available: __________________
Determine the total cash needed to close:
Down payment: __________________
Closing costs including points: __________________
Prepaid expenses (taxes, prepaid interest, insurance, pmi): __________________
Cost of repairs, if any: __________________
Total Cash Needed: __________________
Calculating the total cash needed can be challenging, especially if you’re doing this for the first time. Consider getting help from a real estate or mortgage professional. They’re usually quite generous with assistance and advice in anticipation of helping you with your transaction. Ask your mortgage company to provide a Good Faith Estimate of closing costs–including prepaid expenses.
If you’re short on cash, consider asking the seller to pay your closing costs. Discuss this with your Realtor prior to making your offer. Ideally, you’ll want make a 20 percent cash down payment to avoid Private Mortgage Insurance (PMI) and get the best rate. If you are unable to put 20 percent down, there are many programs available. Here are some of them:
- Zero Down Programs There are many zero down payment programs available. If you qualify for a VA loan, you can get a zero down program. Even if you’re not a vet, several lenders offer zero down loan programs. Your mortgage broker can help you find the best one for you.
- Low Down Payment Programs There are numerous FHA and conventional programs that allow you to put as little as 2 to 5 percent down.
- Piggy Back Loans By getting a piggy back loan, you can generally avoid paying PMI, even though you are putting less than 20 percent down. The most common piggy back loans are:
In the case of an 80-10-10, you put down 10 percent and get two loans–a first loan for 80 percent of the purchase price, and a second loan for 10 percent of the purchase price. Even though the second loan rate may be higher than the first loan rate, you generally come out ahead since you don’t have to pay PMI.
Eighty percent first loan, 15 percent second loan, 5 percent down.
Eighty percent first loan, 20 percent second loan, no cash down.