Gathering everything that you need to purchase a home can be a daunting task. And that’s just in terms of the paperwork. Getting the financials in order is something different altogether.
When you’re buying your first home, there are a lot of hoops to jump through, not the least of which is getting the minimum down payment.
With every home loan that is given, the loan amount is contingent on the down payment. Many financial institutions and financial advisors recommend a 20% down payment. The higher your down payment, then the lower your interest rate will typically be.
The hard thing is putting that down payment together. If this is your first home and you’re trying to save and save for a down payment, then buying a home might feel like a faraway dream.
There are different ways to get that down payment money, certain shortcuts that avoid the usual “saving 10% of your income for years before you buy a home” advice. What are they?
A Loan from a Family Member
A loan from a family member is technically a type of credit, but without all the legal strings attached to it. Generally, if a generous sibling or grandparent will foot the bill for your down payment, then you’re in the clear, relatively speaking – pun intended.
You’ll have to disclose to the financial institution where the money came from. However, most banks and credit unions don’t balk at family loaning money for down payments. It’s a fairly common practice.
There are pros and cons to this. The pro is that you can get a loan for the house. The cons are 1) there may be tax implications for receiving a gift of that size and 2) it’s often said that the worst people to take money from are your family. Why? Because it changes the family dynamic and can hurt longstanding relationships. It’s something to consider.
Can You Use a Line of Credit for a Mortgage Down Payment?
When it comes to a personal loan, it’s possible to use it as a down payment on a house. However, it can be very hard to get a personal loan in the amount needed to make a 20% down payment. Plus, if you’re getting a line of credit for the down payment, then the implications of that line of credit are going to affect your ability to get the home loan.
When your home loan qualifications are being calculated, the mortgage specialist will look at what outstanding debts and assets you have. If you happen to have a massive personal loan for 20% of the value of the home, that could be a red flag for the specialist.
That mortgage specialist will have to decide whether you can pay off both loans and, if not, which one you would default on. If the specialist thinks you’ll default on the home loan, then you won’t get approved.
However, personal loans are often used as down payments for small purchases. That’s often true for the purchase of mobile homes, where the total price (and therefore the down payment) isn’t very high.
Using a Home Equity Line of Credit (HELOC) For a Down Payment
One way you can borrow money to make a down payment is with a home equity loan. Of course, this implies that you already have a home that you not only own, but have equity in. But, if you meet these criteria, then you can leverage that equity to get a down payment for either a new home or a second home — perhaps a rental property or a cabin.
Final Thoughts
No matter what your situation, you’re going to need to make sure that you can make your monthly payments, loan repayments, (plus closing costs) and do it all at the same time. You will need to pay the personal line of credit in addition to the mortgage.
There is no law preventing it. You just need to make the case to your financial institution.