Down Payments: How to Use Gifts, 401(k)s & More to Buy a Home

Christian: [0:00] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. This is your host, Christian Nossum, with the Awesome Nossum Group at Wilson Realty Exchange, Inc. And today I'm joined by my awesome co-host, Mr. Varun Jain.

Varun: [0:12] Hey, guys.

Christian: [0:13] And Miss Joanna Beecher.

Joanna: [0:14] Hello.

Christian: [0:15] All right, so today we're gonna be tackling one of the biggest questions that pretty much every buyer faces, and that is how much do I actually have to put for a down payment? We're gonna start by breaking down the biggest myth in all of real estate, and that you don't need a 20% down payment. Then Joanna will walk us through how gift funds work. Varun will cover creative ways to pull funds from other places so you can use those funds for your down payment. And then we'll round it out with how sellers actually view down payment amounts and the logistics of moving your money around so it's ready for the closing day. So by the end of this, you'll know all the options available to you, and hopefully you'll feel a lot less stressed about this part of the home-buying journey. So first off, let's talk about the elephant in the room, the thing that everyone thinks, almost everyone thinks, and that is the biggest myth in real estate, that you have to have a 20% down payment to buy a house, and it's just not true. The average down payment amount for all buyers, not just first-time home buyers, but all buyers, is between 5 and 7% in the Seattle area market. That fact, when we state it at every single one of our beers and home buying class, it always, always creates a, uh, a pretty big, like, ooh and aah out of the crowd because they didn't know that. Uh, most people assume still that you have to have that 20% down payment. There are plenty of loan programs out there with as little as 3% or 5% down. Uh, FHA loans start at 3.5% for your down payment. There's VA loans. If you're a veteran, you can do that with 0% down. That's actually one of the better loan programs out there. You don't have to put 0% down, but you can, and it's a benefit of being a vet. Uh, but again, most people have 5 to 7% for their down payment. The really important thing is instead of saving up for a huge down payment, get in the market and start building equity. If you do have a smaller than 20% down payment, there is a small monthly fee added to your mortgage called PMI, which stands for private mortgage insurance. This usually only ranges between, like, $80 to maybe $200 a month, depending on the size of your down payment, your credit score, and your purchase price. Another myth is that PMI is huge. Like, it used to be in the early 2000s, it was, like, 5 to $800 or more per month, and that's just really not true anymore. Um, like I said before, it's, it's closer to that 80 to maybe $150 a month, maybe $200 if you have a higher purchase price. Personally- I would much rather buy a house with a smaller down payment and pay, you know, $100 a month in PMI or whatever than wait three more years to save up for that 20% down payment, all while watching home prices continue to increase when I probably will get priced out of the home that I actually want. And in my 20-plus years of being an agent/broker, I've actually seen this happen a lot. I'd have a strategy session with someone to help them understand their budget. I'd create a sold search form to help them see what they can afford, where they want to live, and then they get advice from someone like a family or friend, um, telling them that they can't buy right now. They have to wait until they get a 20% down payment. Uh, then they come back to me in a year and a half or two and a half years later, and they're like, "Hey, I really should have bought when we first met because now the house that I wanted back then is worth like $100,000 or $200,000 more, and I can't afford it anymore. Now I can only afford something different, and I really haven't saved up that much more. I had 5%, now I have 11%, so I'm not even there, and I can't afford the house that I should have bought back then." If you compare the down payment amounts that investors have to have compared to if you're gonna live in the property, they often need like 15% to 25% for their down payment. So as a primary buyer, meaning you're buying this for your primary home to live in, you have so many better options than investors do. So don't let that 20% myth stop you. And a quick tip, if you buy a house for yourself to live in and then, say, you move to another house, or you get a job transfer out of state or something like that, and you want to keep that house and rent it out You don't lose that low interest rate that you got when you bought it as a primary residence just because you're not living there anymore. You get to keep that rate. You don't have to refinance out of it. You don't have to do anything like that. You just keep that loan in place, which is a huge benefit. This is where it's actually a strategy that some buyers use. They buy a house, they live in it for a year or two as their primary residence, then they keep it, rent it out at the lower interest rate, 'cause as a primary buyer, your interest rate is lower than if you were buying it as an investment property, and then they buy another house, and they live there for a couple years. And then they keep that house, rent it out, and buy another one. It's a great way to start building your portfolio. So let's talk about gifts from family members for your down payment, 'cause this is something that we see, I'd say, probably about half of the buyers that we work with have gift funds from family. Joanna, let's talk about that.

Joanna: [5:31] Isn't that nice to have a gift from a family that can help you buy your first home?

Christian: [5:36] Yeah.

Joanna: [5:36] And a lot of buyers don't even realize that you can use gift money from family or close friends, but it's not just a matter of dropping cash into your account, right? Your lender is going to require a gift letter, and this is a signed statement from the person giving you the money confirming it's a gift and not a loan. That's very important. Why? Because lenders wanna know you don't secretly owe it back, since that could affect your ability to repay your mortgage. That makes total sense.

Christian: [6:04] Mm-hmm.

Joanna: [6:05] So if you're considering gift funds, plan ahead, talk to your lender early, get the paperwork going, and make sure everything is documented the right way.

Christian: [6:13] Yeah, and your lender will walk you through exactly how to do this. They do this, like I said, all the time, so they ne- they have, uh, a letter that they c- they will share with you that you can then use to share with your family member to fill out. Sometimes it's just like a fill-in-the-blank type letter. Like, it's, it's super easy. Don't let this stop you from, from moving forward. Varun, let's talk about pulling money from other sources.

Varun: [6:37] Yeah, so there are, outside of just gifts from family members, there are other places where you can get funds from And this could be from assets that you already own. Some of the options that you can consider are a HELOC, which is a home equity line of credit on a different property you own. For example, if you're upgrading from a smaller home or a condo to a larger home because your family has grown or your needs have changed, then you can pull the, pull equity from your first home, use that as a down payment from your-- for the second home. You can also borrow from your 401k, which is your retirement account. Again, there are limits to how much you can borrow, and there are some things that you need to follow, which your lender can guide you on, but that's also another option for you. The last option is great for, especially in, uh, Seattle, where we have s- a large population of tech workers, is a securities-backed line of credit where you, again, use your stock portfolio as your asset and borrow against that for your down payment. Now, each of these options have their pros and con- cons. I've used two out of the three that I talked about. I've used a HELOC and an SBLOC for my down payment in the past. When we go back to pros and cons, for example, a 401k loan It lets you borrow from yourself, right? But that also reduces your retirement balance. So the amount that you have now borrowed from the 401doesn't grow over time while you have borrowed it out. Once you pay it back, then it again starts to compound over time. Similarly, the HELOC and the SBLOC, again, depends on the equity that you have in either your home or your stock portfolio. One of the key things to do here is make sure if you are planning, just like gift funds you're planning ahead, these are also things you need to plan ahead. Plan ahead, set up your HELOC well ahead of time. Set up your SBLOC well ahead of time if you know you're gonna be buying a home, so that these things are in place and you're not trying to rush and set these up, because there is a lead time to sometimes setting these up. Uh, you don't wanna delay close. So get your ducks in a row on the down payment side before you kind of get into the, uh, under contract on a property.

Christian: [8:40] Yeah, that's a really good point. And we have a whole episode all about SBLOCs, so if you do have some interest in learning more about a securities-backed line of credit, just check out that podcast. All right, let's also talk about how sellers view your down payment amount. I think a l- another myth is that sellers, they're gonna look at your down payment and they're gonna say, "Hey, you only have a 5% down payment. You're-- You don't have enough money to buy this. I'm gonna go with this person that looks stronger, quote-unquote, because they have a higher down payment, because that makes it look like they have more financial stability." That's not actually the case. While the seller might think that, their agent is quickly going to debunk this myth, and the reason why is because the listing agent, the one that helps the seller, they're going to really understand that it's more about who the buyer's lender is, who their bank is, who's giving them that mortgage, than it is about how much they have for their down payment. If the buyer is going with a local mortgage company that has a great reputation, the person at that mortgage company who they're working with is someone that is trusted and knows what they're doing, but they only have a 5% down payment Uh, they're probably gonna lean on that higher than they are going to like a Chase Bank or a Bank of America or Wells Fargo, or especially Rocket Mortgage or something online that has a really bad reputation. So as a buyer, the biggest thing that you can do to help yourself look strong is not the bigger the down payment, it's more about getting pre-underwritten. And this is something that a lot of people have never heard of. We have great lenders that we recommend that do pre-underwrite you upfront. What this does is it helps you look like you're an all cash offer even though you're not. Because it allows you, if you choose, to waive your financing contingency and be super strong in a competitive situation. In a non-competitive situation, you're the only offer, it still makes you look super strong because the bank has already gone through all of your documentation and ensured that, yes, you can afford this loan. Yes, you do work where you work, and yes, you do make the amount of money that you, that you make. And by the way, we've already reviewed your taxes, and they look good too. So yeah, we're gonna give you this loan no matter what. It's just depending on which house you wanna buy. So that's where if you don't have that twenty percent down payment, don't feel discouraged because if you're working with a good, solid lender, which again, we can highly recommend some people, we don't get any kickbacks or anything crazy like that for recommending you to a lender. What we do get is you knowing that you have a ton of confidence in working with someone that will actually get the loan done, which is the biggest part. Joanna, let's talk about how to actually submit your down payment to the escrow company. Like how does this kinda work?

Joanna: [11:42] Okay. So here's a little behind-the-scenes detail. You can't just move a big chunk of money into your account the day before closing Okay, that makes sense. Lenders want funds to be, quote, "seasoned," which usually means they've been in your account for at least two months. If you're moving money around, whether from a gift, a 401, or another source, plan ahead and give it time to sit. If you don't, you'll need to show clear documentation of where the money came from. So the earlier you talk to your lender and move your funds, the smoother the process is gonna be.

Christian: [12:13] Yep, exactly. Like, if you're getting a gift, that's totally fine. It doesn't have to be sitting there for two months. You just have to have a letter explaining it, which you would have to have anyway. Yep. If you're borrowing from your 401, they just wanna see where the money came from. When they say they wanna see it seasoned, that's like if-

Varun: [12:30] If it's an inheritance or if it's a large bonus from work, like, those are the few instances where if it's seasoned, it's easier to explain. Even with other, like, as long as you have a legitimate source of funds and you can explain it using bank statements or other kind of documentation, you should be fine. Perfect.

Christian: [12:48] Yeah. All right. That wraps up today's episode on down payments. So here's the big takeaway. Again, the biggest myth in real estate, you do not need a 20% down payment to buy a house. Between lower down payment programs, gift money, tapping into other assets that you already have, and some smart planning around seasoning your funds, there are a lot of different paths to homeownership than most people realize. Thank you, Varun and Joanna, for helping me break this down. If you, as the listener, found this helpful, be sure to subscribe and share it with someone who's thinking about buying in Seattle, or you can always come to our next Beers and Home Buying class. We host them every single month. They are 100% free, and you can see where the nest- next class is by just heading to beersandhomebuying.com (opens in a new tab) to sign up. Again, totally free, no pressure, no nothing. Uh, it's not like a timeshare presentation. It's just about an hour-ish long. There's free beer. Some venues, they actually have food, and we just teach you how to buy a house. So that's it for this episode of the Awesome in Seattle podcast. We'll see you next time. Thank you.

Joanna: [13:54] Bye.

Varun: [13:54] See ya.