Down Payment Strategies and Tips for 1st Time Home Buyers in Los Angeles

Feel like your down payment is getting in the way of purchasing your home? Let’s break down this barrier for you and work together to complete your down payment successfully.

It doesn’t always take 20% down

Many down payment options are available and you are not limited to having to put 20% down. Lenders prefer you to put down 20% but even if you’re a first-time home buyer, it may be a lot lower than you think. 

Mortgages can be go-to low down payment loans if guaranteed by the Federal Housing Administration (FHA), Department of Agriculture (DA) or Department of Veteran Affairs (VA). Usually those who qualify are not even required to have a down payment at all. However, since the mortgages are backed by the VA, a funding fee is charged on the VA loans, but it can be deducted from your monthly payment.

In some cases you can put down as little as 3.5% down with an FHA-backed loan. With getting an FHA-backed loan comes a price: you’d have to pay insurance on your mortgage. FHA loans have a limit as to how much is lent, will not be available for all condos and townhomes, but are available for single family homes.

First-time home buyers can get the benefit of getting low down-payment programs offered by conventional loans which are not backed by the government. These down payments usually consist of loans starting as little as 5% down.

Note* that a lower down payment means you will pay a higher interest rate and a higher monthly payment. You may also need to pay mortgage insurance for under 20% downpayment loans. There may be loans that you can combine, for example and 80/10 loan. That means you would only put down 10% and have two loans: one at 80% of the purchase price and one at 10% of the purchase price. There are so many options!

Crowdfunding a Down Payment

Ways to fundraise for causes or necessities can be used by creating a GoFundMe page or Kickstarter. Contributions from people who donate as a gift to you and/or your spouse are towards your down payment, which can then be transferred to your bank account. Make sure to check with your lender about keeping a paper trail to source the funds.  They may need to be in your account for a certain amount of time prior to purchasing.

Family Down Payment Gifts and Loans

Tired of searching for more ways to make money by paying off your down payment? Maybe now is the time to start asking for help from family members. Mortgage lenders require the donors to verify in writing that they made the gift and they are currently financially stable in order to make the donation. These requirements need bank statements as proof and a letter confirming that the donation made is made out as a gift, not a loan. Lenders require such evidence of bank statements and for the donors to verify in writing that it is a gift because we do not want to deal with people asking for their money back after donating it. Verifying terms in writing helps the donors make a statement that the money should be used as a gift.

It may not be the best option to solely rely on family members to give you money.

State and Local Down Payment Assistance
Another great way to receive help in paying your down payment are state and local assistance programs. There are around 2,500 initiatives across the nation according to Rob Chrane, CEO of Atlanta-based Down Payment Resource.

There are programs to assist you in every state, even focusing more on neighborhoods. Assistance for everyone is executed by nonprofits, foundations, the government, and employers.  These programs may change however.  Based on the home’s location and price, it’s a matter of matching the property to the program. Thus, there are maximum sales prices for a county or possibly a geographic definition. The programs of assistance are typically for lower income and not to buy million dollar homes or vacation properties.

Statewide programs can limit the income requirements offered in different areas.  The programs are more widely available than what people assume of just low-income housing. 

Using Your Retirement Accounts

Pretty much everyone has a 401(k) retirement plan to help them retire in the future. You may be tempted to touch that plan and retrieve money out of it to help pay for your down payment. The 401(k) plans help allow for penalty-free hardship loans or withdrawals. If you are under the age of 59, you need to pay income taxes and a penalty on the withdrawal. It can be tiresome trying to repay a loan on your down payment.

Withdrawals from Roth IRAs, and some other IRAs, are generally preferable to taking money from a 401(k). Up to $10,000 is allowed for IRA withdrawals for home purchases. Make sure to have the account for at least 5 years in order to have Roth withdrawals that are without penalty and tax-free. You will be triggering income taxes if you tap an IRA.

Most Obvious Strategy

SAVE SAVE SAVE your money!!  Those cappuccinos, lattes, bobas, and poke bowls add up $$$.  If you don’t want to get into paying large loans and be able to have enough money to save for your taxes, spend less than what you earn. 

**************************

All information deemed accurate, but not guaranteed, as of the time of this writing: June 2021.  The information here is not deemed to be legal in nature and readers should consult with their financial and legal advisors prior to taking any action.