First-time home-buyers are often surprised by the requirements of obtaining a mortgage, especially when it comes to the down payment. One way you can improve your chances of getting a home loan is by putting at least 20% down at the time of purchase. For existing homeowners like me, coming up with a 20% down payment usually starts with selling the home I’m in right now and using the equity to make a down payment on my next home.
But what about someone that may be buying a home for the first time? Coming up with a $50k down payment on a $250k home may take several years of aggressive saving, but your retirement account may not be a bad place to go for the additional funds needed to get you on the path to homeownership. In fact, the IRS offers certain breaks for taxpayers that choose to use retirement assets to purchase a first home. Here’s how it works.
Who qualifies as a first-time home buyer?
Interestingly enough, you don’t actually have to be buying a home for the first time in your life to be considered a “first-time” home buyer. IRS publication 590 defines a first-time home buyer as any home buyer that has had no present interest in a main home during the 2-year period ending on the date of acquisition of the new home. In other words, as long as you haven’t lived in a home you owned for the last two years, you are considered a first-time home buyer even if you owned a home previously. If you are married, your spouse must also meet this no-ownership requirement.
Using your IRA
Most people know that when you take money out of a traditional IRA prior to age 59½, there is usually a 10% penalty for early withdrawal. However, the IRS offers an exception that allows you to withdraw up to $10,000 over a lifetime without penalty for first-time home purchases. Keep in mind that while the distributions are not subject to penalty, they are still subject to income taxes. $10,000 probably won’t be enough to cover your full down payment, but it can help.
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