There are a lot of renters who could afford to become homeowners if they had just one thing -- a down payment. They might be able to afford a mortgage payment, but it's tough in some markets to save any money after paying rent. Even programs like My Community Mortgage and Home Possible, two mortgage programs for first -time home buyers, require three percent down. If you want to buy a $200,000 home, then, you'd have to come up with $6,000 plus closing costs. If you save $250 a month, that's two years before you have a down payment. And guess what? If the house appreciates at a normal rate, in two years the property could be selling for $208,000! It's not easy to hit a moving target.
Can You Borrow a Down Payment?
Mortgage lenders do allow applicants to borrow down payment funds, but only from approved sources. For example, you're not allowed to get a gift or a loan from the home seller, the real estate agent, mortgage lender or anyone else who would benefit from the property sale. You can borrow against your 401(k), because that's pretty much borrowing from yourself.
Community mortgages do allow you to borrow your down payment, and if you purchase a one-unit property, like a single family home or a condo unit, none of the down payment has to come from your own funds.
One source of down payment funds and closing costs is what Fannie Mae calls a "Community Second" mortgage. A Community Second mortgage is any down payment assistance loan that is offered by a municipality, state, county, state or local housing finance agency, nonprofit organization, a regional Federal Home Loan Bank under one of its affordable housing programs, or an employer. It may not be funded by the property seller or any other interested party to the transaction; however, a lender may fund a Community Seconds mortgage that an employer guarantees as part of an affordable housing program.
Another acceptable source is a loan that is secured by collateral that you own; for example, an auto refinance or mortgage against another property.
What about a Personal Loan?
Because personal loans are unsecured, most mortgage programs do not allow them as sources for down payments. Credit card advances are also not allowed because they are unsecured. However, some borrowers use personal loans or credit cards to pay for other living expenses, which allows them to increase the amount they can save for emergencies or a down payment. This is not a good idea unless you are very good at money management and have no problem making on-time payments on all of your debts.
- The personal loan or line of credit payment must be included in your debt-to-income ratios. Even if the loan does not appear on your credit report, you need to disclose it.
- Your down payment savings deposits should be easy for an underwriter to track and verify. If your paycheck is automatically deposited into an account, that makes things easier for you. You won't have to make copies of your checks and deposit slips. Just provide two or three months of bank statements when you apply for your mortgage.
- Your income needs to be enough to qualify with the new mortgage, your other debts like auto loans and credit card balances, and the personal loan payment. You can use a Home Affordability Calculator to determine what's affordable for you. Under a moderate scenario. the total of all your payments -- principal, interest, mortgage insurance, property taxes and homeowners insurance (or HOA dues if you buy a condo) plus your car payments, student loans, minimum credit card payments, and personal loans (but not living expenses like food or utilities) should not be more than 36 percent of your gross (before tax) income. If you earn $6,000 a month, these expenses should not exceed $2,160. If you want to be very conservative, these amounts shouldn't exceed $1,680.
If you're a first-time homebuyer, chances are there are lots of down payment assistance programs available to you -- through state and local governments, charitable organizations and national programs like HUD's Good Neighbor Next Door program. You may have to complete a homebuyer education class, but the help you receive can get you into a new home without increasing your borrowing.