How Today’s Homebuyers Are Making Homeownership Happen

Homeownership can feel out of reach for some, but the money needed to close doesn’t always have to come entirely from your savings. Depending on your loan program, you may be able to combine gift funds, down payment assistance, retirement withdrawals, or loans, seller contributions, and low-down-payment loans to bring the amount of upfront cash you need within reach.

 

Today’s buyers are navigating a particularly challenging combination of home prices, mortgage interest rates, and everyday expenses. For someone hoping to purchase a home, one of the biggest obstacles may not be the monthly mortgage payment itself; it may be coming up with the money needed upfront. The down payment on a home is only part of the equation – then there are closing costs, prepaid expenses, moving costs, and the need to keep some money in savings, which can make the amount needed to purchase a home feel intimidating.

 

Here’s something many prospective buyers may not realize: the money you bring to the closing table doesn’t always have to come entirely from your savings account. Depending on the loan program and your individual circumstances, there may be several ways to put together the funds needed to purchase a home.

 

This article walks through strategies today’s buyers may want to explore, from family gifts to assistance programs to loan options that require less than 20% down.

Can you use a financial gift from your family to buy a home?

 

For some buyers, homeownership becomes possible with a little help from family.

 

Many mortgage programs allow buyers to use gift funds from an eligible family member or other permitted donor toward some or all of their down payment and closing costs. Depending on the loan and property type, it may even be possible for the entire required down payment to come from gift funds.

 

That means a parent, grandparent, or other eligible donor who wants to help you purchase a home may be able to contribute directly toward the transaction rather than simply helping with expenses after you move in.

 

There are rules to follow. Your lender will typically need to document that the donor is an allowable source to provide funds, as well as documenting the funds leaving the donor’s account and being received into the buyer’s account. Additionally, a gift letter will need to be signed that will document all parties’ information, the trailing information of the funds and the fact that the funds are a gift with no expectation of repayment.

 

 

If someone has offered to help you with your home purchase, talk with your lender before transferring any money. Documenting the gift properly from the start can make the mortgage process much smoother.

 

What down payment assistance programs are available?

 

Down payment assistance isn’t necessarily limited to buyers with very low incomes, and you shouldn’t assume you won’t qualify without looking into the programs available to you.

 

Programs vary considerably by location and eligibility requirements, and some options may require monthly payments. Assistance may be available through state and local governments, housing agencies, nonprofits, and other organizations. Depending on the program, assistance might come in the form of a grant, a forgivable loan, a deferred-payment loan or another type of financial help.

 

Some programs are designed specifically for first-time homebuyers, while others may target certain communities, professions or income levels.

 

The important thing is to ask your loan officer. A homebuyer who assumes they need to save every dollar themselves could overlook assistance that makes purchasing a home sooner possible.

 

 

Can you use retirement funds to buy a home?

 

Your retirement account probably isn’t the first place you think to look for homebuying funds, and using retirement savings should never be taken lightly. But there are circumstances where those funds can be used toward a home purchase.

 

One example applies to Individual Retirement Accounts (IRAs). Under current federal tax rules, a qualifying first-time homebuyer can withdraw up to $10,000 from an IRA for qualified home acquisition costs without paying the typical 10% additional tax for an early distribution. For this purpose, “first-time homebuyer” generally means you haven’t owned an interest in a primary residence during the previous two years.

 

The $10,000 is a lifetime limit, and income taxes may still apply depending on the type of IRA and the circumstances of the withdrawal.

 

Workplace retirement plans such as 401(k)s operate differently. The first-time homebuyer exception to the 10% additional tax generally doesn’t apply to 401(k) distributions. However, some employer plans allow participants to borrow against their 401(k), which could provide another potential source of funds.

 

Using retirement money today also means giving up some of its potential future investment growth, so this isn’t automatically the correct strategy. Before making a withdrawal or taking a loan, consider speaking with your financial and tax professionals in addition to your mortgage lender.

 

 

Can a seller help pay your closing costs?

 

The purchase price isn’t the only thing you can negotiate when buying a home.

 

Depending on the transaction and mortgage program, a seller may agree to contribute toward certain buyer closing costs. These are often referred to as seller concessions or seller credits. For example, instead of negotiating a lower purchase price, a buyer might negotiate for the seller to contribute toward allowable closing costs or prepaid expenses.

 

Why can that matter? Reducing the amount of cash required at closing may allow a buyer to keep more of their savings for moving expenses, repairs, furnishings, or an emergency fund after purchasing the home.

 

There are limits on seller contributions, and your lender and real estate agent can help you understand what’s permitted, and whether requesting a seller contribution makes sense for a particular property.

 

 

Do you really need a 20% down payment?

 

One of the more persistent homebuying myths is that you need a 20% down payment. You don’t.

 

Several mortgage options allow qualified buyers to purchase a primary residence with substantially less than 20% down. FHA financing, for example, can allow a minimum down payment of 3.5% for qualifying borrowers. Certain conventional loan programs may offer low-down-payment options as well, while eligible VA and USDA borrowers may have access to financing that doesn’t require a down payment.

 

Putting less down can come with tradeoffs, including mortgage insurance, funding fees, or a larger monthly payment. But for some buyers, waiting years to accumulate a 20% down payment isn’t their only option. Understanding the financing available to you can help you compare the cost of buying sooner with the potential benefits of waiting and saving more.

 

 

Can you combine multiple funding sources?

 

Perhaps the most important thing to understand is that these strategies aren’t always mutually exclusive.

 

A buyer might have money saved but receive additional gift funds from a parent. Another could combine personal savings with down payment assistance. Someone else might negotiate a seller credit that reduces their closing costs and allows them to keep more cash in reserve.

 

In other words, buying a home doesn’t necessarily require one giant pile of cash sitting in your bank account. It may involve piecing together several eligible sources of funds.

 

 

Start with the numbers, not assumptions

 

Today’s housing market can make homeownership seem out of reach, particularly when you start adding up a down payment and closing costs. But don’t disqualify yourself based on assumptions about how much money you think you need.

 

A conversation with a mortgage professional can help you understand what you may qualify for, approximately how much cash you’d need to close, and which sources of funds may be available for your particular loan. You might discover you’re closer to buying a home than you think.

 

Ready to find out what buying a home could look like for you? Connect with a Summit Mortgage Loan Officer to explore your financing options and build a homebuying strategy that fits your goals.

 

 

Frequently asked questions

 

How much money do I actually need to buy a home?

 

The amount varies based on your loan program, the home’s price, and your location. Beyond the down payment you’ll typically need funds for closing costs, prepaid expenses, and moving costs, plus some savings in reserve. A Summit Loan Officer can give you an estimate of the cash you’d need to close for your specific situation.

 

Who can give me gift funds for a down payment? 

 

Many mortgage programs allow gift funds from an eligible family member or other permitted donor, such as a parent or grandparent. The donor will need to sign a gift letter confirming that repayment is not expected, and your lender will typically need documentation showing where the money came from. Rules may vary by loan and property type, so talk with your lender first.

 

Do down payment assistance programs only help low-income buyers?

 

No. Assistance isn’t necessarily limited to buyers with very low incomes. Programs vary by location and eligibility, and some target specific communities, professions, or income levels. Others are designed for first-time homebuyers. It’s worth asking about programs available to you before assuming you won’t qualify.

 

Is it a good idea to withdraw from retirement savings to buy a home?

 

It depends. A qualifying first-time homebuyer can withdraw up to $10,000 from an IRA for qualified home acquisition costs without the usual 10% early-distribution tax, though income taxes may still apply. The 401(k) first-time homebuyer exception generally doesn’t apply, but some plans may allow loans. Because withdrawals reduce potential future growth, speak with your financial and tax professionals first.

 

What’s the lowest down payment I can make?

 

Eligible VA and USDA borrowers may access financing with no down payment. FHA loans allow a minimum of 3.5% down for qualifying borrowers, and certain conventional programs offer low-down-payment options. Lower down payments typically come with tradeoffs such as mortgage insurance or a larger monthly payment.