Finding a Down Payment to Buy a House
In today's real estate market, lack of a down payment discourages many would-be home buyers.
Most home buyers don't have large cash reserves and will want to make as low a down payment as possible. Luckily it's often possible to buy a house -- especially a starter house -- for a modest down payment. But most buyers will have to put down between 5%-20% of the home's purchase price, unless they qualify for a zero or low down payment plan.
If you haven't already saved up thousands of dollars, here are some ways to raise the needed funds.
Borrowing From Your 401(k) Plan
An excellent source of down payment money is a loan against your 401(k) plan. Check with your employer or the plan administrator to see whether your plan allows for loans. If it does, the maximum loan amount under the law is the lesser of one-half of your vested balance in the plan or $50,000 (unless you have less than $20,000 in the account, in which case you can borrow the amount of your vested balance, but no more than $10,000). Other conditions -- including the maximum term, the minimum loan amount, the interest rate, and applicable loan fees -- are set by your employer. Any loan must be repaid, with interest, in a "reasonable amount of time," although the Tax Code doesn't define "reasonable."
Be sure to find out what happens if you leave the company before fully repaying a loan from your 401(k) plan. If the loan would become due immediately upon your departure, income tax and penalties may apply to the outstanding balance. But you may be able to avoid all this hassle by repaying the loan before you leave.
Tapping Into Your IRA
You can withdraw up to $10,000 penalty-free from an individual retirement account (IRA) for a down payment to purchase your first principal residence. (However, you may have to pay income tax on the withdrawal, and you might have less time than you'd like within which to return it to the IRA if you decide not to use it.)
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