Your FHA loan: Finding funds for down payment and closing costs

by Karen Lawson
August 17th, 2010

FHA currently insures the majority of mortgage loans for first time home buyers; FHA guidelines allow for a 3.5 percent down payment compared to the 20 percent minimum typically required for a conventional mortgage loan. Cash-starved first timers may be more likely to qualify for a mortgage loan under flexible FHA requirements, but you’ll still need to come up with some cash. When planning to buy your first home, these ideas can help with meeting your up-front mortgage costs.

  • Cash gifts: FHA allows borrowers to use cash gifts from relatives and friends as a source for down payments and closing costs. The donor must document that the amount given is a gift and is not expected to be repaid. Gifts in excess of $13,000 for an individual and $26,000 for a couple are subject to income taxes. Consult a tax accountant or financial advisor for more information on tax liability.
  • Second job or home based business: Use your professional expertise to offer consulting, tutoring, lawn care or whatever skills you have. Direct extra income from these activities to a savings account dedicated to your home purchase. Although the job market hasn’t recovered, word-of-mouth “gigs” may be easier to land. Put the word out among friends and associates that you’re looking for extra work.
  • 401(k) or IRA Accounts: Some employer sponsored 401(k) retirement plans allow for taking loans from your account. This shelters the funds from taxes, and ensures that you’ll put the funds back into your retirement account. You may also qualify for a tax-free withdrawal from your IRA or 401(k) for buying your first home. Ask your retirement plan administrator for details of what your plan allows.
  • Direct deposit savings accounts: Set up a savings account specifically for saving for a home. Arrange direct deposits coinciding with your paydays. if you need help with budgeting, contact a HUD approved housing counselor for assistance.

State and local home buying assistance programs: Start with your state’s housing finance agency, and also ask local real estate agents and mortgage lenders about city and county based home buyer assistance programs. These programs are generally  limited to first time buyers and income eligibility guidelines, but can provide low cost loans for meeting your down payment and closing costs. In some cases, these loans don’t have to be repaid until you vacate the home you’re buying.

FHA Guidelines Promote Owning a Home

FHA guidelines are designed for making owning a home accessible to moderate income families and individuals. Taking time to ensure that you’re ready to buy a home and make mortgage payments helps to ensure that you’ll find an affordable home that you can enjoy for years.

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