Homebuyers looking for a down payment shouldn’t tap into these accounts


More and more lenders are requiring a 20% down payment to qualify for the best mortgage rates. Using these money accounts to buy a home can cause unexpected financial stress. (iStock)

Mortgage interest rates are trending toward record lows for qualified homebuyers in today’s housing market. This may be one of the best times for interested buyers to get a low rate and buy the perfect home.

However, loan eligibility for many types of mortgages may be more stringent during the pandemic.

For example, more mortgage lenders were requiring a 20% down payment to benefit from lower interest rates and avoid expensive private mortgage insurance that results in higher monthly payments. Borrowers may also need a higher credit score or a clean credit history and a larger down payment to more easily qualify for a mortgage.

Homebuyers may look to dip into other financial accounts when their savings account doesn’t have enough cash to make the down payment needed for the best mortgage payment. Buyers can compare current mortgage options by visiting Credible to compare rates and mortgage lenders.

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Consider These Home Buying Options First

Existing homeowners can use the equity in their current home to cover the deposit difference and make a good home offer.

Two more options for saving money are selling unwanted items or doing temporary work and setting aside income for a home loan purchase.

A first-time home buyer may be eligible for a mortgage down payment assistance program offered by some cities and states.

Another option for aspiring borrowers is to consider an FHA loan or a VA loan, insured by a federal agency. These types of loans have more flexible debt ratios that benefit lower incomes and are more forgiving to applicants with lower credit scores. A mortgage broker like Credible can help homeowners compare loan programs.

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Avoid exploiting these financial accounts

Withdrawing from the following accounts should be an option of last resort to avoid future financial strains. You can also avoid penalties and potential withdrawal fees.

  1. Pension saving
  2. Brokerage accounts
  3. Emergency fund
  4. Specific objective funds
  5. Health savings accounts

1. Retirement savings

IRA and 401k retirement accounts may be the first place you consider when you are decades away from your golden years. But most early withdrawals before age 59.5 carry a 10% early withdrawal penalty and tax-deferred contributions are subject to income tax.

First-time homebuyers can withdraw up to $ 10,000 from retirement funds and waive the 10% early withdrawal penalty, but they are still subject to income tax.

These distribution fees may require a larger withdrawal amount than expected to afford a mortgage purchase. Investors are also sacrificing potential future earnings and tax benefits.

2. Brokerage accounts

Selling investments from a taxable brokerage account will not result in early distribution penalties such as a tax-advantaged retirement account. However, realized capital gains are subject to short-term and long-term capital gains taxes.

Additionally, the potential returns on investments may be higher than the current rates and fees that mortgage lenders charge over the life of the loan. Financing the purchase of real estate from accounts with a lower yield similar to today’s fixed rates may be a better option in this housing market to increase your equity, whether your mortgage term is 15 years. or 30 years old.

If homebuyers aren’t sure where they can get the money for a down payment, they should visit Credible to connect with experienced loan officers and get their mortgage questions answered.

3. Emergency fund

Surprise bills happen every now and then, but saving for a mortgage payment takes advance planning.

Using your emergency savings for a down payment or closing costs may require you to borrow money at a high borrowing rate when an unforeseen event occurs. Personal loan interest rates are higher than home loan rates, making it harder to pay off debt.

As much as you want to buy instead of rent or avoid private mortgage insurance, an emergency account should be for unforeseen bills like urgent medical care or vehicle repairs.

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4. Specific objectives fund

Many households have different savings accounts for specific purposes, such as saving for college or a replacement vehicle. These withdrawals are not subject to the same early withdrawal penalties or tax treatment as investment accounts.

Failure to replace these funds on time can delay a purchase or borrowing at a higher mortgage rate later.

5. Health savings accounts

Households with a high deductible health plan can contribute tax-free to a health savings account (HSA). Withdrawals are tax free for qualifying medical expenses.

HSA funds can also be withdrawn for non-medical expenses like buying a home or paying a larger down payment. The withdrawal amount is subject to an early withdrawal penalty of 20% and is considered taxable income.

Conclusion

Homebuyers should look for ways to save small amounts of money each week to afford a down payment and avoid future financial problems.

A mortgage calculator can estimate the down payment required for a 30-year mortgage or a 15-year mortgage and other loan origination costs that must be prepaid. Visit Credible to compare lenders and find your personalized mortgage rate.

Have a finance-related question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.

About Matthew R. Dailey

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