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For Sale by Owner Articles • Owners.com - Mortgages and Financing

Acceptable Sources of Down Payment

Bank Accounts
Your bank account is the first place you should look for down payment money. It is easy to cashout, and it doesn't earn you much interest relative to borrowing rates.
Investment Accounts
Most investment accounts are easy to liquidate, but you may want to hold on to your bonds and employee stock options until they mature.
Retirement Accounts
Many retirement accounts allow you to borrow against them when you are buying a house. However, this increases your debt and therefore lowers the amount you can borrow to buy your new home.
Real Estate
Real estate is one of the least liquid assets, but most people can't afford to own two houses at one time. Regardless of whether it is a savings account, checking account, or money market account, lenders see bank accounts as highly liquid assets.
New Deposits
Money hidden under your mattress and recent large deposits can only be used for a down payment, if you can document where you got the money.
If the deposit is a family gift intended for the down payment, be sure to get a "Gift Letter" documenting it.
The lender's fear is that this large sum of money that magically appeared came from a borrowed source. If the house is purchased with borrowed money, that would raise your debt ratios and means that, effectively, none of your own money would be in the transaction. The lender is also concerned with whether the new money is illegal money, because if so, the government can take the house and the lender is out of luck. Most lenders are insured against such things, but they still try to avoid laundering money.
Joint Accounts
If you have a joint account with your spouse, you can count the entire balance as an asset. A joint account with any other person, even if they are buying the house with you, can only be counted as an asset if you get a letter stating that you have access to the full amount from the other holder of the account.
CDs
If you close a certificate of deposit account (CD) before it matures, you will be charged a penalty. Often, this will mean that any accrued interest will be lost.
This is not the end of the world if you just opened the account, but if it's two months from maturity, you might want to reconsider cashing it in.
Investment Accounts
If you decide to cash in your investments, be realistic about how much cash they will generate for your down payment. This means making conservative assumptions about the performance of your portfolio and taking into account the cost to cash it in.
Stock Options
Stock options usually have a low initial value and have the potential to be worth quite a bit more in the future. Thus, this can make selling them a last resort.
Savings Bonds and Treasury Notes
With a savings bond, early redemption will cause you to lose some accumulated interest. You need to make sure that cashing in a savings bond would significantly change your down payment amount enough to make it worth while.
A treasury note is not liquid. If it hasn't matured, you can't use it. A mature note can be used, but make sure that you don't renew the note before you try to sell it.
If you have any savings bonds or treasury notes that you would consider selling for the down payment, count their redemption value.

Borrowing Against Investments
Lenders know that by increasing your debt you have less money each month to pay your mortgage. So if you would prefer to borrow against your investments rather than selling them, remember that the added debt lowers the size of the mortgage that you can qualify for.

Retirement Accounts
Generally, you can use 100% of your contributions to your retirement accounts, and a fraction of your employer's contribution, for your down payment.

401k
With a 401k, you can usually use 100% of your personal contribution and about 50% of your employer's contribution for a down payment.
There are two basic ways to draw on your 401k:
Withdraw the Money
If you choose to do this be aware that you have to pay a tax penalty, and that your participation in your company's 401k program may be suspended for as much as 1 year. Given this penalty, this is generally not a good idea.
Take a Loan
You can use your 401k as collateral for a loan to buy a house. This loan can only be for up to 50% of the vested amount in your account. Usually, you can only take out one loan on your account at a time, so if you are planning to borrow against it for your kids' college tuition, or need the security of having that money around in case of an emergency, don't use it now.
Also, know that if you change jobs and don't roll over the account, you may have to pay the loan back immediately, or it will be counted as a withdrawal and will be taxed.
Remember that if you borrow against your 401k, you will have to make payments on the loan, which decreases the amount cash that you have available for your mortgage payment.
IRAs
IRA accounts can be a little more complicated than 401k accounts. Many allow you to withdraw up to $10,000 to buy a first home, but it's often only after you have held the account for a few years.
Other Retirement Accounts
If you have another type of retirement account, be sure to check with the administrator to see if you can draw from it or borrow against it, and what the ramifications will be.
Real Estate
If you have sold (or plan to sell) your house, investment property or vacation home and plan to use the proceeds for a down payment, don't forget to subtract transaction costs and the amount that you still owe to lenders and the tax man.
Transaction Costs
When lenders look at the proceeds created by the sale of a property, they usually knock 10% off the top for transaction costs. So if you sold a $100,000 house, they would only count it as a $90,000 asset.
This is to account for a range of fees including the standard 6% real estate sales agent fee. If you sold it yourself, they'll deduct less.
Outstanding Balances
Then you subtract the balance of any outstanding mortgages from the $90,000. Don't forget those pesky prepayment penalties if you bought the house recently.
If you're not sure, check your mortgage agreement to see if you opted for a prepayment penalty. If so, it is usually in effect for 3 years after the purchase.
Capital Gains Tax
In August, 1997, the federal government made major changes in the way in which the profits from the sale of homes are taxed. To determine the tax on the profit from the sale of a house sold after May 7th, 1997, you need to calculate the profit and know how much of the profit is tax exempt.
Calculating Profit from the Sale of a House
A quick way to calculate the profit on the sale of a house is to take the selling price and subtract the adjusted basis, which is the sum of the purchase price, all the money that you spent on major improvements (like a new roof, not repairs and paint jobs) and the transaction costs.
Tax Exemptions
Assuming that the house has been your primary residence for at least two of the last five years before you sell it and you're not selling a multi-million dollar mansion - much, if not all, of the profit that you make is tax exempt. Single home owners get a $250,000 exemption, and married homeowners get a $500,000 exemption. Any profit made over this amount is taxed at the 20% rate.

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