I recently had a good friend that expressed interest in buying a home of her own and getting out of the shared residence in which she was living. She has a good job and a good credit rating but she didn't have a down payment and could not go to family to have them "gift" her a downpayment. Long story short... her boss announced that possible cutbacks and layoffs were on the way and she immediately wihdrew from the buyer's market not knowing what her future income outlook would be. Smart woman!
In the course of researching all of the possible ways for her to get into a house I stumbled on what appears to be a great way to make a house purchase a reality for those that currently don't think it is possible. It involves three things:
1.) Employer 401K savings
2.) The 2009 First Time Homebuyer Credit (FTHC)
3.) A rule within the First Time Homebuyer Credit
Scenario: Potential homebuyer has good credit, a good job with 401k (or other) plan savings and wants to buy a house but doesn't have the cash-on-hand downpayment. The FTHC program allows the tax credit to be applied to tax returns for 2009 EVEN IF THE HOUSE IS PURCHASED IN 2010! That's right... a buyer that purchases a principal residence home in 2010 under the FTHC program can take the tax credit on their 2009 OR 2010 tax return! They don't have to wait to file their 2010 tax return in 2011! The homebuyer takes a short term loan against their 401k (no more than $8,000) to use as their downpayment. The government allows a loan against a 401k plan without penalty for a home purchase. They make the home purchase while making monthly payments (three or four months) on their 401K repayment loan that supplied the downpayment. They should take the "401k loan" for a longer term (three years for example) to keep the monthly payments as low as possible. Once the sale is closed and the mortgage has been secured the new homeowner completes their tax return including their FTHB tax credit which will generate a refund check coming back to them for the $8000 tax credit. With that money, they repay their 401k loan very early and are left only with the regular mortgage payment on their newly purchased home.
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