More lenders require a 20% down payment to qualify for the best mortgage rates. Using these money accounts to buy a home can cause unexpected financial stress. (iStock)
Mortgage interest rates are trending near record-lows for qualified homebuyers in today's housing market. Now can be one of the best times for interested buyers to secure a low rate and buy the perfect home.
However, loan eligibility for many types of mortgage loans can be stricter during the pandemic.
For instance, more mortgage lenders required a 20% down payment to qualify for lower interest rates and avoid pricey private mortgage insurance that results in higher monthly payments. Borrowers may also need a higher credit score or a clean credit history and a larger down payment to make it easier to qualify for a mortgage
Homebuyers may be looking to pull from other financial accounts when their savings account doesn’t have enough cash to make the necessary down payment for the best mortgage payment. Buyers can compare current mortgage options by visiting Credible to compare rates and mortgage lenders.
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Consider these home buying options first
Existing homeowners can use their current home equity to cover the deposit difference and make a good home offer.
Two additional options for saving money are selling unwanted items or working a temporary side hustle and setting aside the earnings for a home loan purchase.
A first-time homebuyer may qualify for a down payment assistance mortgage program that select cities and states offer.
Another option for aspiring borrowers is to consider an FHA loan or VA loan, insured by a federal agency. These loan types have more flexible debt ratios that benefit smaller incomes and are more lenient to applicants with lower credit scores. A mortgage broker like Credible can help homeowners compare loan programs.
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Avoid tapping these financial accounts
Withdrawing from the following accounts should be an option of last resort to prevent future financial stress. You can also avoid potential withdrawal penalties and fees.
- Retirement savings
- Brokerage accounts
- Emergency funds
- Specific goal funds
- Health savings accounts
1. Retirement savings
IRA and 401k retirement accounts may be the first place you consider when you have several decades until your golden years. But most early withdrawals before age 59.5 incur a 10% early withdrawal penalty and tax-deferred contributions are subject to income taxes.
First-time homebuyers can withdraw up to $10,000 from retirement funds and waive the 10% early withdrawal penalty, but they are still subject to income taxes.
These distribution fees can require a larger-than-anticipated withdrawal amount to afford a mortgage purchase. Investors also sacrifice future potential gains and tax benefits.
2. Brokerage accounts
Selling investments from a taxable brokerage account won’t incur early distribution penalties like a tax-advantaged retirement account. However, realized investment gains are subject to short-term and long-term capital gains taxes.
Also, the potential investment returns can be higher than the current rates and fees mortgage lenders charge for the life of the loan. Funding the real estate purchase from accounts with a lower yield similar to today’s fixed rates can be a better option in this housing market to increase your net worth whether your mortgage length is 15 years or 30 years.
If homebuyers are unsure of where they can get the money for a down payment, they should visit Credible to get in touch with experienced loan officers and have their mortgage questions answered.
3. Emergency funds
Surprise bills happen from time to time, but saving for a mortgage payment requires advance planning.
Using your emergency savings for a down payment or closing costs may force you to borrow money at a high loan rate when an unforeseen event happens. Personal loan interest rates are higher than home loan rates, making it harder to pay off debt.
As much as you may desire to buy instead of rent or avoid private mortgage insurance, an emergency account should be for unplanned bills like urgent medical care or vehicle repairs.
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4. Specific goal funds
Many households have different savings accounts for specific goals like saving for college or a replacement vehicle. These withdrawals are not subject to the same early withdrawal penalties or tax treatment as investment accounts.
Not replacing these funds on time can result in delaying a purchase or borrowing at a higher mortgage rate later.
5. Health savings accounts
Households with a high deductible health plan can make tax-free contributions to a health savings account (HSA). Withdrawals are tax-free for qualifying medical expenses.
HSA funds can also be withdrawn for non-medical expenses like buying a home or paying with a larger down payment. The withdrawal amount is subject to a 20% early withdrawal penalty and considered taxable income.
Conclusion
Homebuyers should look for ways to save small amounts of money each week to afford a down payment and avoid future financial stress.
A mortgage calculator can estimate the necessary down payment for a 30-year mortgage or a 15-year mortgage and other loan origination costs that must be paid upfront. Visit Credible to compare lenders and find your personalized mortgage rate.
Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
