Your down payment doesn’t have to be a roadblock on your journey toward owning a home. Coming up with a lump sum of money for a down payment can be daunting for many first-time buyers. You want to put a large amount down but don’t want to wipe out your entire savings. There are many ways to figure out a down payment that works for you and allows you to purchase your dream home! This article will give you ideas on how to find money for a down payment in Colorado.
How Much do you Need for a Down Payment in Colorado?
How much money you need for a down payment depends on the type of mortgage you secure. Lenders of conventional loans require amounts ranging from 5 to 20 percent down. However, Federal Housing Association (FHA) loans require as little as 3.5 percent down. If you’re a veteran, you could qualify for programs that don’t require a down payment at all!
How much you decide to put towards your down payment goes further than your minimum requirement. For example, if you’re a first-time buyer, you want to put only some of your savings into your house. You’ll likely need some of that cash once you’re a homeowner! Instead of putting all your savings into your down payment, keep some funds to help you afford monthly payments on your dream home. Alternatively, if you have a big chunk of change stored away, allocating more for your down payment can save you money in the long run.
Private Mortgage Insurance 101
Mortgage insurance reimburses your lender if you default on your loan. Requirements vary based on the loan type, but it is typically charged to borrowers who put less than 20% towards the down payment on a home. 20% down means your loan-to-value ratio (LTV) is 80%. Any LTV over 80% usually requires mortgage insurance.
A smart strategy for first-time buyers who don’t have 20% down is to have your lender slightly increase your interest rate instead. This slight increase will minimally impact your monthly payment, but it might be enough to avoid the cost of private mortgage insurance.
Homebuyer Assistance Programs
As a first-time homebuyer, you may qualify for state assistance programs. Many of these cover some of your down payment. Additionally, some lenders also offer grant programs that help with down payments and closing costs. Check out the U.S. Department of Housing and Development for a complete list of programs to help you find the money for a down payment in Colorado.
Tap into Your Retirement Accounts
You may think of your retirement nest egg as off-limits. However, digging into that savings account to fund your home purchase may ultimately save you money. Consider the following options:
- Borrow From Your 401(k) Plan. Check with your employer to see if your 401(k) plan allows for loans. If you have less than $20,000 in the account, you can borrow the amount of your vested balance but at most $10,000.
- Withdraw Funds From Your IRA. Usually, money in an IRA can only be withdrawn after you reach a certain age without incurring a 10% penalty. However, you don’t have to worry about a penalty if you’re a first-time buyer or someone who has yet to own a principal residence for two years before signing a binding sales contract. You can withdraw up to $10,000 penalty-free from an IRA for a down payment if you meet these requirements. If you and your spouse are both first-time buyers, each of you may pull from your retirement accounts, giving you a total of $20,000 in cash.
- Withdraw Funds From Roth IRA. The rules are slightly different if your savings are in a Roth IRA. The $10,000 you take out for your first home is a qualified distribution as long as you’ve had your Roth account for five years. This means you can take out your retirement money without penalty. Additionally, Roth earnings are tax-free!
Reach Out to Friends and Family
If you have people in your life that can help you make your home-buying dreams a reality, then go for it! You might be reluctant to ask your friends or family for money, but don’t let pride stand in your way. Keep in mind the following tax implications:
- Gift from family. You can accept gifts up to $14,000 without worrying about the gift tax. Tax forms require documentation, so you need a letter stating that the money is indeed a gift with no expectation of repayment.
- Borrow money from family or friends. You may prefer to ask for a loan rather than a gift from a loved one. However, your lender needs to know if you borrow money from family or friends.
Funding your first home purchase can be stressful and confusing. If you’re struggling to finance your home purchase, let’s chat! Over the years, I’ve helped many buyers figure out how to finance the purchase of their dream home.
I'm Lauren Haug! I'm a teacher-turned-real estate agent, and I teach people how to build wealth through real estate in Northern Colorado.
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