Down payments are a common hurdle for many people. Fortunately, there are options that may be able to help you get past this barrier and buy your dream home! In this blog post, I'll cover 3 different types of down payment alternatives so you can understand which one is right for you.
1) Seller Financed Down Payment:
You might know this as "Owner Carry Back." This option allows the seller to finance your down payment in exchange for an increase in the purchase price of the home.
This option is ideal for buyers who are ready to purchase a home and have some money saved but don't have enough cash on hand.
Seller financing can be an attractive option if the seller offers it at competitive rates or terms.
The downside is that you may need to pay more in interest over time than with other down payment alternatives such as seller financing.
It is also not possible to negotiate an owner carry back down payment with the current mortgage interest rates that are lower than your credit score can qualify for, as you will need a higher interest rate loan in order to use this option.
2) Gift Funds:
A gift from someone else can be used to make up your down payment if they meet certain requirements (such as having enough income).
This option is attractive to people who have a generous family member or friend.
The downside to this option is that the gift funds cannot be used as an equity line of credit, and you will be personally responsible for repayment in case the other person does not pay back their loan obligation to you.
You should also remember that there are limits on the amount of a gift that can be tax-free.
For example, in the US an individual donor may give up to $15,000 per lifetime without having any taxes incurred on it. If you have already used this limit before investing in your home with a down payment alternative like a gift fund then you will need to pay taxes on that amount.
A gift fund down payment is also not available to you if the seller requires a minimum credit score in order for your purchase contract to be accepted and finalized (this typically happens with mortgage loans).
Be sure to discuss this option with a financial advisor before taking it on, as there are many other factors that may come into play depending on your personal situation.
Lastly, if you are considering this option then be sure to have a discussion about the terms of repayment with the recipient beforehand! You don't want them to forget that they loaned you money and not pay it back when their due date is up.
3) VA Loan:
Veterans or active-duty military members have access to a VA loan which is backed by the federal government.
This type of loan can have more lenient credit requirements than other types and offers an interest rate that is fixed for life if approved.
The downside with this type of down payment alternative is that you may need to pay mortgage insurance periodically or in full upfront before your loan is approved.
It also typically takes longer to get a VA loan than other types of mortgages with no additional fees involved (including title and escrow).
Summary:
You have many options for down payment financing. We hope you found this article helpful in your search to find the perfect solution that meets both your financial needs and those of the seller. Now, it's time to get out there and make a purchase! If you're still feeling unsure about which option is best for you or would like some help deciding, we are here to help. Reach out today and one of our team members will be happy to talk with you more about these 3 types of down payment alternatives as well as other mortgage loans available today. What type do you think works best?
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