Home Ownership: Drumming Up the Down Payment

Published Sunday, July 26, 2009 @ 9:46 pm

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It’s a couple of years after your debts were discharged in a Chapter 7 bankruptcy, you’re on track with your payments and expenses, and you’ve been working steadily to rebuild your credit. Now you’re ready to buy a new home: you’ve done all the homework, you’ve looked for good lenders and you’ve found your dream house. All you need now is to borrow what the house is worth, right? Well, not quite. If you have had some negative history on your credit report since your bankruptcy, you may need to come up with as much as 30% of the value as a down payment in order convince a lender to extend a loan to you. That’s why it’s important to work diligently on repairing and maintaining your credit after bankruptcy. And if you’ve got a clean record since bankruptcy? Even with great credit, most lenders will only allow you to borrow somewhere between 80% and 90% of the cost of your new house. This means that you will generally have to come up with up to 20% of the value of the new house as a down payment. Ouch.

Good news: you may be able to get a loan with a lower down payment if you purchase your home with an FHA or Veteran’s Assistant home loan. An FHA loan is a loan issued by a federally qualified lender which is insured by the Federal Housing Authority; thus, the Federal Housing Authority doesn’t actually provide the loans. The purpose of the FHA lending program is to help people who can’t afford a conventional home loan process, including the down payment, thus aiding low-income buyers and people who have struggled with financial problems to attain their dreams of home ownership. With an FHA loan, your down payment could be as low as 3% of the selling price of your new home, or even less. FHA loans are great for first time buyers and for people who haven’t owned a home for over three years. FHA loans are also excellent for people who have a bankruptcy on their record as recent as two years―FHA lenders are more likely to extend a loan to these aspiring home owners. An FHA loan will also allow you to roll closing costs into the loan, which will make buying your home even easier. The only sum you’ll need up-front will be the down payment. There are some drawbacks to the FHA program: a prominent one is that in order to qualify, the house’s value is subject to a cap.

If you have money in a 401(k), you are permitted by law to withdraw up to 80% of the account’s value to pay for a house that will be your primary residence. In order to avoid an unsavory surprise later, you should ask the 401(k) plan administrator to take taxes not paid out of the amount you are to receive.

If you don’t have the money for a down payment on hand or in an account such as a 401(k),  what then?  Fear not, there are other steps you can take to come up with the down payment. Each state has a housing authority, and these agencies frequently run programs to help people who are struggling to come up with the down payment for a new home. A housing authority may be able to provide you with a grant, a bridge loan, or other means to help you drum up that down payment. You will generally need to meet certain requirements, so you should check out the housing authority in your state to see what these are and what you can do to qualify. A directory of state housing authorities can be found at: http://www.ncsha.org/section.cfm/4/39/187.

Brought to you by the Law Offices of John T. Orcutt. Call 1-800-899-1414 for a free initial debt consultation.

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