There is this magical fraction where home buying is concerned: 20/80. It means twenty percent down on the cost of the home with the mortgage for the remaining eighty percent of that amount. Thus, the $100k home would have a mortgage of around $80k after the down payment is made.
Why is this a magic number? No one can really explain why lenders want to see that 20% put down against the purchase, but even if you don’t have that sum at hand, you can still find a way to get the funding together in order to get the best terms possible.
For example, let’s consider a few ways that people can pull together the 20% down payment if they don’t have it already sitting around in a bank account.
1. Gift- Most lenders are absolutely fine with you supplying the magical 20% down if a portion of it comes as a gift. For instance, let’s say you are able to sock away $10k over the first four or five years you are married. You find the perfect house, but you know that getting a mortgage for it with a ten percent down payment is not likely to be possible. You don’t qualify for a subsidized or first-time homebuyers loan, and so you feel like you might be unable to take any action. Your parents, uncle, or best friend learns of the matter and says that they’ll give you the remaining money. They see it as all of your birthday and holiday gifts at once or as your inheritance, etc. The bank sees it as cash in hand. The one thing that they will ask of you is to validate the source of the funds. Most ask for a gift letter and documentation that traces the origin point of the money and how it made its way from “account A” into “account B”, etc.
2. Loan – Take a loan to get a loan? Most banks will not let you borrow from another lender to get your down payment together, but if that parent, uncle, or best friend can lend you the $10k over a five year period (or longer), the bank may be able to work with you. Here’s how it would have to work: an official loan is made to you from that person(s) and formal documentation surrounds it. There has to be at least a minimal amount of interest applied to the loan, and you have to make monthly payments over five years or more to quality. Naturally, this loan is now put into the debt to income ratio and used to calculate whether or not you can afford the mortgage with this loan and any other monthly payments you must make as well.
3. Borrow against 401(k) – This is not one we suggest. It is tricky at best and may not even be allowed. It can turn into a total disaster if you lose your job after you take this loan because you will end up owing the entire balance within the next 90 days. So, if you borrow that $10k from the 401(k) and lose your job a year after you get the house, you somehow have to put together that money within three months.
Don’t despair if you don’t have the 20% sitting in the bank. If you have friends or family who can give or loan you the funds, most banks are happy to consider that as part of the loan approval process.