I’m interested in buying a house. I understand all of the hoops that one must jump through during the mortgage process. The problem that I’ve encountered is accumulating enough money for a down payment and closing costs.
By my estimate I’ve already got about 30% of the total money I think I’ll need. But with student loans and my paltry salary I think it will take me another 3-4 years to save the rest of the money.
After some thinking, I don’t see why I couldn’t borrow the money for my down payment. Specifically, once I buy the house I get a tax deduction for the interest I pay, so that’s money right back in my pocket. What’s wrong with borrowing the money for the down payment and then repaying the loan with my tax refund? I figure it would be the equivalent of saving the money except that I’m already in the house, AND I have more money available for the cause because my tax bill is lower. It’s almost like a catch-22: once I scrounge around for the money and finally buy a house, then I end up having the cash flow I need after the fact.
I realize that I would never be able to borrow this money from a bank or other third-party, because the mortgage lender would look negatively on borrowing money that should be my own in the first place and I would be taking on additional debt. I could, however, ask my parents or someone else for a private loan that the lender would never know about…
Assuming my parents would loan me the money, does anyone see problems in this scheme?
The banks are dying to lend you money. If you cannot meet their criteria without fudging on the down payment money then its probably not a good idea.
The requirements for eligibility are setup to
a threshold that is likely to meet with success in repayment. You taking on
more bills to them is more risk and unlikely to meet with success in repayment.
There are mortgage repayment programs on the web - get one and run the numbers and see what your life would be like paying the payments to the bank, dp loan with interest and all your other bills factored in. What do you have left and is the quality of life ok at that level? Its informative for you to practice running the numbers and become familiar with figuring this all out. You may fine that tweaking the “paltry salary” is the best plan given the numbers = more schooling.
Maybe there in Houston you make 75K and are having a tough time setting up for a $800,000 home.
I don’t make 75k (i wish…)
I’m not looking for an 800k house (again, i wish…)
I’m familiar with all of the blah blah blah about borrowing.
Succinctly, I’m wondering about borrowing money from my parents for my down payment and then repaying that money from the tax advantages gained through home ownership (assuming my tax circumstances stay the same). Either way, I’m putting money towards the down payment - I just end up in the house more quickly this way.
I don’t see it as taking on any more debt - the net effect would be zero - money in money out… Does anyone else see it differently?
The lender will want to verify the source of your funds. If this money shows up suddenly in your bank account, they are going to want to know where it came from and how it happens to be yours. If you do work a deal like this with your folks you will have to have that money in hand several months before you go mortgage-shopping. Either that or you will need a gift letter from your parents, stating that they are giving you the money as a gift, with no expectations of repayment. Please be aware that lying on a mortgage application to a federally chartered bank is a federal offense.
Couple of other options: look for sellers who will lease-option a place to you, giving you credit for some percentage of your rent toward your down payment. Or, look for a seller who is willing to hold their own paper on the house. Or, look for one of those low-down payment plans; I’m given to understand that there are programs where you can put as little as 5% down (assuming you qualify to make the payment on the remaining balance).
Be aware that there can be quite a few “surprise” expenses in the first year or two when you buy a house. You know, water heater, appliances, furniture etc. And that, depending on what month the deal closes, your tax benefit may not be all that large.
Go ahead and use the resources mentioned above. If they indicate that you can’t afford a mortgage at this time, then you probably can’t.
Going through forclosure and/or bankruptcy will only delay your dream more.
Good luck.
peace,
mangeorge
I only know two things;
I know what I need to know
And
I know what I want to know
Mangeorge, 2000
When I bought a house in California in 1996 I borrowed almost the entire down payment (10%) from my parents. You need to have the money for two months in order for the bank not to care where it came from. Otherwise, if you get the money less than two months before you apply you need to have your parents fill out a thing saying it’s a gift and they don’t expect you to pay it back, which would be a lie and probably illegal ifyou do intend to pay it back. If you have the money for two months you just need to act like it is all yours and you never have to lie about it. It helps if your parents are flexible and dont require you to start making payments right away.
Check to see what kind of loan you can get. There are different kinds and you may qualify for one that doesn’t require a lot of money down. My parents bought a HUD home several years ago and they didn’t put very much down.
Also, you can when the time comes you can see if the sellers will pay part of your closing costs. My husband and I just recently bought a home and the people selling paid $3000 of our closing costs. I think after our “good faith” money and the rest of the closing costs, we paid about $4500 total on a $134,000 loan.
I don’t recall the details, but my sister only put $1000 down on when she bought her house (about 5 years ago) and she put the closing costs on her credit card. It all depends on your mortgage holder and type of mortgage.
And btw, the mortgage interest will not necessarily increase your refund, especially if you don’t have much else to deduct. My brother’s first 2 years, his itemized deductions (including mortgage interest) were less than the standard deduction. Mine didn’t for 1998 year (but then, I’d only had a half year of mortgage interest) and I haven’t done my 1999 taxes yet, so I couldn’t say for 1999.
I’m with the posters that say the tax advantages won’t necessarily offset the additional costs. Do you have property taxes and how high are they ? There are always things that need to be fixed that you wouldn’t need to pay for if renting etc. Ever hear the term “money pit” ? Make sure you talk to other people who have recently purchased houses in the same area and ask them what surprise expenses they incurred and whether they felt that mortgage interest was enough of a write off to give them a higher tax refund.
When I was looking for a house, I looked at several HUD homes. These are basically foreclosed homes, and all of them were, without exception, dumps. If the previous owner couldn’t make the payments, then neither could they afford to maintain them.
A realtor friend of mine said she likes to sell HUD homes because the realtor gets both the listing and selling commissions.
The HUD homes are usually listed pretty cheap, but when you see HUD, think “fixer-upper.”
I suppose there may be some decent “HUDs” out there, but caveat emptor.
That is true about the house being a fixer-upper Rysdad. Fortunately my dad works ons carpet, tile, hardwood floors, and ceramic counters for a living. On top of that I have an electrician, plumber, and a house painter for uncles. My dad has also been known to trade jobs with friends for new cabinets and other things needed. Their house was not that bad but my parents gutted the whole place out and remodeled the entire inside. It helps if you’re extremely handy around the house or if you know people who can help out.
You’re lucky to have all those helpful relatives, Grace. I wish I did. I bought a well-maintained house, but still there are always on-going home maintenance projects that need to be done. I’ve had to learn more about plumbing, drywalling and carpentry than I ever cared to.
When I bought my first house, I had no cash and borrowed the down-payment money from my parents. The bank didn’t want my down-payment money to be borrowed, though (this was in the early 70’s), so my parents had to sign a document stating that the money was a gift, not a loan.
I felt really guilty about borrowing that money from my parents, though - they were retired and really didn’t have a lot of money to spare - so a few months later I went to the same bank, gave them a made-up story about how my parents were in a desperate situation and I really wanted to give them those funds back, and applied for an unsecured loan equaling my original down payment.
The bank gave me the loan, and even put down as the reason that it was to pay back a loan (not a gift) from my parents. Go figure.
Looks like my husband and I are going to do any repairs that come up. I have handy relatives but they live about 250 miles away. We’ve pretty much made a few trips to Lowes and Home Depot just to familiarize ourselves with what kind of stuff they have.
<<Specifically, once I buy the house I get a tax deduction for the interest I pay, so that’s money right back in my pocket. >>
NO!!! A common misconception among 1st time home buyers is that your tax bill pays your interest. You can deduct the interest from your INCOME, not from your taxes. If you are in the 20% tax bracket, you save 20 cents in taxes for each dollar spent on interest. Remember 80% of the interest still comes out of your pocket, only 20% comes out of Uncle Sam’s pocket.
Most everyone who has replied thus far has beat me to the punch as far as telling you about the vagaries of taxes and the necessity for you to be able to prove you haven’t borrowed your down payment.
One thing I don’t think I’ve seen mentioned – does Texas have a public corporation to assist first time buyers? Here in Kentucky, we have the Kentucky Housing Corporation. Seven years ago, I was able to purchase a $45000 house with down payment & closing costs of $2000 total.
Another route you might want to try, if you have a 401k, is to either get a loan of your 401k money or actually withdraw money from it. Talk to the people who maintain it, but I think you can withdraw a certain amount for a house down payment without incurring penalties on your taxes. We actually got a loan from our 401k to pay part of our down payment…we are paying it back to ourselves. The bank didn’t even blink when we told them this and our mortgage officer actually said it was a good idea.
FHA loans go as low as about 3% down. There are also some extra charges associated with that kind of loan, some of which can be financed, so in the long run it’s going to cost you a little more than 3% but you’ll recoup some of that in the first month. FHA is definitely something to check into if you haven’t already; also, if you’re eligible for them I think some VA loans don’t require ANY down payment.
If you do need to get money from someone else, they have to give it to you outright with no expectation of repayment and have to sign a document to that effect. While you may not be specifically questioned about a large deposit to your bank account if it happened several months ago, I seem to remember a question like “is any of the money you’re using for the down payment borrowed?” on the loan application itself.
Signing the gift letter means that if the mortgage is foreclosed, or if you declare bankruptcy, then your parents (or whoever) have no lien against the house and are not entitled to partial recovery, even though you’d probably rather pay them than the bank.
As long as you keep up your payments, though, it doesn’t make any practical difference to the bank or the government if you want to return the “gift” later.
