Second-Time Homebuyer Down Payment Strategies
Do Second-Time Homebuyers Need a Down Payment?
The quick answer is yes, it is almost certain that you will need a down payment.
How much do you have to put down on a second home? That answer will depend on how much you can afford and how much is required by the loan program you use to purchase your next home.
As a current homeowner, you’re in a different position than a first-time buyer. It’s likely your credit score has changed and you may qualify for different loan programs. Of course, it’s also possible that you would qualify for the same program that you used before. For example, if you purchased your current home with a Federal Housing Administration (FHA) loan, you may want to use that program again.
You’ll also have more options for funding your down payment. This is due to the value of your current home and the equity you’ve built up. Plus, when you do close on your current house, it’s likely you will have made a profit that can be used toward a down payment on your next home. So in many ways, you are in a much stronger position.
Can Second-Time Homebuyers Use Their IRA as a Down Payment?
When purchasing a first home, some buyers rely on funds taken from an Individual Retirement Account (IRA) to cover the down payment. It’s understandable, but it’s not repeatable.
The Internal Revenue Service (IRS) wants you to use that money for retirement, not to live in the here and now. So if you were counting on using your IRA again to afford the down payment, you’ll likely need to look elsewhere. We say “likely” because there are ways to use your IRA for the down payment on your next home. For example, if you have not owned your home for a set number of years, you will requalify as a first-time homebuyer and could use your IRA savings for the down payment.
If you have a 401(k), you may also be able to borrow against it, but that also has a number of stipulations and conditions you’ll need to meet.
It’s advisable to work with a personal loan officer to understand what might be involved in either of these situations.
How Does a Second-Time Homebuyer Save for a Down Payment?
If you are able to save money for a down payment, absolutely do it. But don’t feel like you’re doing something wrong if you can’t find a way to set money aside each month.
Many second-time homebuyers find that saving money is difficult. Newsflash, life isn’t cheap, and it’s certainly more expensive when you are paying a mortgage and covering other homeowner costs like insurance, maintenance and utilities.
Case in point, according to the National Association of Realtors, 13% of buyers think saving up for a down payment is the most difficult part of the process. This means the saving idea, while good in theory, is not always a realistic option.
There are ways you can try to make saving money easier. One of our favorite suggestions is to set up a special down payment saving account with your bank. Then have a portion of each check directly deposited into it. Doing this makes it feel like a tax, or money you never had. Clearly, this method only works if you have discretionary money available. If you are going from check-to-check just to cover the basic living expenses, you might need a different strategy to fund the down payment.
Can a Second-Time Homebuyer Make a Contingency Offer?
Many homeowners expect to use the profit from their current home to cover the down payment for their next home. Ideally, this is how things should work out. But it can become a complicated path that requires many things to work out just right.
Here’s the thing you need to understand — you don’t make any money until you sell your current home. If you plan to sell your home and then rent a place to live or stay with a friend until you find your next home, you’re in good shape. But if you are depending on a contingency deal, well, best of luck to you.
When you make a contingency offer for the next home you hope to buy, you are saying to its current owner that you expect to sell your home by a certain date. For our example, let’s say July 1.
Then on July 2, you promise to close on their home and take possession of it.
On the surface, this plan makes sense. You get paid on July 1 and use that money to purchase your next home on July 2. How hard is that? Well, pretty hard.
First, the owner of the home you hope to buy has to trust you can sell your house by the date promised. Otherwise, the whole deal falls apart. Which is why many sellers try to avoid contingency offers.
Next, the buyer of your home will have to agree to close on the date you set. That may not work for them. Additionally, you’ll often ask them to close on one day, but not ask you to vacate until the next day so you don’t need to keep all of your belongings in storage for the time gap between the July 1 closing and July 2 purchase.
Also, closing a deal isn’t always a clean process. It’s not uncommon for issues or delays with title searches, lender approval or down payments to occur. Any of these issues or others could cause you to miss your July 1 closing date, and therefore, fail to meet the July 2 closing on your next home.
And this is just a simplified overview of the challenges.
Yes, contingency offers can and do work, but it can feel a bit like pulling off a magic trick.
Ideally, if you want to use the profit from your current home, plan on selling it and arranging for interim housing while you look for your next home.
Bridge Loans and Home Equity Loans for Second-Time Homebuyers
Second-time homebuyers that currently own their home can try turning to a bridge loan or home equity loan to fund the down payment for their next home.
We could go into detail explaining how these loans work, but in general, our best advice is to connect with a personal loan officer. These options are only right in very specific situations. If you don’t understand all the fees, payments, requirements and stipulations, you can get yourself into a financial mess. We don’t say this to scare you. We mention it to warn you.
A bridge loan or home equity loan are cases where a little information is not enough. You need a wealth of knowledge, experience and support to structure a bridge loan or home equity loan the right way for your situation.
Would a Second-Time Homebuyer Qualify for an FHA Loan?
Once you get your down payment strategy squared away, it’s time to look at home loan options.
If you own a home and remain financially qualified, you can use an FHA loan to purchase your next home. Qualifying for an FHA loan mostly depends on your credit score and the condition of the home. It is not tied to your income, need or being a first-time homebuyer. Allow us to repeat that last part: you do not need to be a first-time homebuyer to use an FHA loan.
It’s a common misconception that an FHA loan is only for first-time homebuyers. Where does this misconception come from? Likely, its confusion with other federal loan programs. For example, a USDA loan does have requirements about income and home location. Also, it could be rooted in the misplaced assumption that because an FHA loan is commonly used by first-time homebuyers, it is only for first-time homebuyers. Again, it’s not. You can use an FHA loan to purchase your second, third or fifth home if you continue to qualify.
Are There FHA Energy Efficiency Programs for Second-Time Homebuyers?
There are a number of reasons people decide to move into a second home. More space, more rooms, more bathrooms, better kitchen, the list goes on and on. Increasingly, one of the newer drivers of changing one’s address is energy efficiency.
More people prefer to live in homes that use less energy and are therefore more affordable to own. Some purchasers also appreciate the environmental benefits of owning an energy-efficient home.
Because of the growing interest in energy-efficient homes, The FHA created the FHA Energy Efficient Mortgage or FHA EEM. It offers additional funds above and beyond the loan amount for approved energy-saving features. This program can be used whether you are purchasing your next home, or refinancing your current mortgage.
Find Help Developing Your Down Payment Strategy as a Second-Time Homebuyer
Moving into your next home is an exciting idea. Turning that idea into reality will take some planning. More specifically, you’ll need a plan to fund the down payment. You do have many options, and you can make the move to your next home. However, you will need to work with a personal loan officer who knows the way and can guide you through the choices. Your next home should be better than your current home, and it will be if you approach it with the right plan.