If you're hoping to purchase a home in the near future, you may be excited by news of low interest rates that continue to drop. Obtaining a 15- or 30-year mortgage loan at a historically low interest rate can set you up for future financial success by minimizing your interest payment -- therefore allowing you to get more home for your money. But what can you do if you don't quite have enough of a down payment saved up to begin seriously shopping? Read on to learn more about your options for financing (or avoiding) a down payment.
Check into low- or no-down-payment loans
The federal government offers several types of mortgages that have a very low (or even no) down payment requirement. If you're a veteran, you may be able to obtain a VA mortgage that will allow you to borrow up to 103.3 percent of the value of your home without any down payment or private mortgage insurance (PMI). This will allow you to roll everything from application and appraisal fees to closing costs into the loan without paying anything out of pocket.
Another no-down-payment lending option is a USDA loan. These loans are available only for certain applicants (generally low-income applicants or those who live in rural areas), but will allow you to borrow up to 100 percent of the value of a home and roll any closing costs into this loan without penalty. Although you'll pay an up-front funding fee of 2 percent and a monthly mortgage insurance rate of 0.50 percent, these fees should be manageable in the context of a low-interest mortgage with no down payment.
If you don't qualify for either of these loan programs, you may still be able to avoid much of a down payment with an FHA loan. These loans have a minimum 3.5 percent down payment but (unlike most other mortgages) permit this down payment to be granted or gifted, rather than requiring that it come from the applicant's own personal funds.
While these federal agencies don't lend money themselves (with the exception of the USDA), they do guarantee repayment to the lender if you default on the loan, allowing the lender to offer you a competitive interest rate even if you have poor credit or a fairly thin credit history.
Consider your tax-free options
If you've made contributions to a Roth IRA in the past, you should be able to withdraw these contributions for use as a down payment (or for any other purpose) without paying any taxes or early withdrawal penalties. However, if you're under age 59 and first opened your Roth IRA within the last 5 years, you won't be able to withdraw your earnings on these contributions without paying taxes (although you will avoid penalties on the first $10,000 in earnings withdrawn for a first-time home purchase).
If you're under age 59 and your Roth IRA has been in place for more than 5 years, you should be permitted to withdraw up to $10,000 in earnings for a first-time home purchase without paying taxes or penalties. These flexible options should allow you to withdraw a portion of your contributions and possibly your earnings for use as a down payment without paying a penny in taxes.
Another tax-free withdrawal option is the Health Savings Account (HSA). While you're only permitted to withdraw from such an account to pay for qualified health-related expenses, you're also permitted to reimburse yourself for eligible expenses you've paid out of pocket. For example, if you had $10,000 in medical bills during a time you were covered by a high deductible health plan (and therefore eligible for an HSA), but paid these bills from your personal savings or using a credit card, you'll be permitted to later withdraw up to $10,000 from your HSA as reimbursement for this covered expense. You can then use this cash for a down payment or to help with closing or moving costs.
For more information, contact a local mortgage company or visit sites like http://www.firstmortgagecompany.net.