Chicago First Time Home Buyer: Three Often Overlooked Home Down Payment Sources

Jan. 13, 2010 - PRLog -- We all know right now is a great time to buy a home. Rates are low, home prices are low and the first time home buyer tax credit is still available. One of the obstacles many Chicago first time home buyers face is coming up with the money for a down payment. There are three sources for a down payment that many first time home buyers overlook.

1. IRAs

The IRS allows a first time home buyer to withdraw up to $10,000 from an IRA penalty free and tax free. For a married couple this means, each spouse can each withdraw $10,000 with no penalty, which would allow you to withdraw $20,000 to put down on the home. If you do not have an IRA a family member may be able to help you. Family members are allowed to withdraw money from their IRA to use toward the down payment of a home for a first time home buyer. The IRS will allow a first time home buyer, their spouse, a child, a grandchild, a parent or other ancestor, to withdraw up to $10,000 from their IRA penalty free and apply it to the purchase of a home. One thing to be careful with is when you withdraw money from your IRA. According to the IRS you must use the IRA funds within 120 days toward qualified acquisition costs. These costs include buying, building or rebuilding a home. along with normal settlement, financing or closing costs.

The IRS defines a first time home buyer as someone who had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement." What this means is this does not have to be your first home you just cannot have owned a home for the past two years.

The rules for a Roth IRA are different. The $10,000 taken out for your first home is a qualified distribution as long as you have had your Roth account for 5 years. This means you can take the money out of your Roth penalty free and since your Roth earnings are tax free you won't have to pay the IRS either.

2. The 401K

The second source for your down payment is to borrow money from your 401k.I have worked with several clients in the past who were paying in to a 401k but had not considered using this money towards their down payment. Many 401k plans will allow you to take money out for the down payment on a new home. The 401k does have downside to it. Unlike the money you take out of your IRA you will have to pay back the money withdrawn from your 401k. 401k plans can differ slightly so be sure to consult the 401k plan administrator to see how the payback works.

3. Borrowing Money from Family or Friends.

Yes I know most people think of this option but many people are afraid to ask friends or family for money especially with the current economic issues. Buyers picture the conversation with Mom and dad we and just cringe. On the surface it is not a bad request and if your parents or other family members have the money maybe they would consider giving you a loan for your down payment. As many of you know the government is giving a tax credit of up to $8000 to first time home buyers. What if you were to try the following approach?

"Mom and dad have you heard about that first time home buyer tax credit the government is giving? John and I have been looking at homes and right now we do not quite have the down payment required. We were wondering if you could borrow us the money we are short for our down payment with the understanding that once we get our first time home buyer tax credit we will repay you what we borrowed?"

Not only have you told them that you intend to repay them but you are also telling them how. Now if mom and dad do not have the money there is not much you can do. Maybe other family members would be willing to help you get into your first home.

Like i said borrowing money from family members is nothing new but it does come with some additional pain. Approaching the repayment of the money you borrowed with a government tax credit now that is a bit different. In reality you may only need to borrow the money for 3-6 months depending on how long it takes to get your tax refund.

The first time home buyer tax will expire in April of 2010 so do not wait too long to try this approach. This deadline means you will need to have a contract on the home you intend to purchase by the end of April and you will need to close by June 30,2010.

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I specialize in working with Chicago first time home buyers.My goal is to make the process of buying a home a smooth process. I also help seniors obtain a reverse mortgage which in many cases can help seniors stay in their homes and never have to make a mortgage payment again.