Downpayments Dip Into Stocks Or Ask Mom And Dad

Dated: November 4 2015

Views: 385

To finance a home purchase, some buyers reach deep into their savings. Others rely on the Bank of Mom and Dad.


In 2014, about one-fifth of borrowers sold stocks or bonds, or borrowed against their retirement accounts to pay for a home purchase, according to the National Association of Realtors®.

"There are no hard and fast rules regarding if and when to cash in stocks to make a home purchase," The Wall Street Journal reports. But many financial planners would caution about borrowing from a retirement plan since homeowners risk penalties and an income-tax bill if they don't follow the loan repayment terms.

As an alternative to selling stocks, some borrowers get a loan secured against their assets. For example, Bank of America Merrill Lynch offers a "loan-management account" that offers borrowers a line of credit based on their Merrill Lynch taxable brokerage portfolio holdings. The funds can go to several uses, including a downpayment to pay for a home. But there is a risk: If the stock market drops significantly, borrowers may have a margin call and be forced to pay the difference between the required collateral amount and its current market value, says Mike McPartland, head of investment finance for Citibank Private Bank North America.

Advice for borrowing against savings:

  • Don't wait until the last minute to cash in stocks because you hope values will rise. Stocks could drop instead and affect a borrower's ability to qualify for a loan. Also, buyers could risk delays on the home closing since the sale and money transfer can take several business days, says Peter Grabel, managing director of Luxury Mortgage Corp., based in Stamford, Conn.

  • Lenders tend to value cash in a bank account higher than stocks or mutual funds when determining whether the applicant qualifies for a mortgage. Lenders usually value a portfolio at 70 percent of its current monetary value, Grabel says.

  • Capital-gains taxes could lurk. Borrowers who have had stocks appreciate significantly likely will face the tax when they sell their holdings, which could then end up adding to the cost of the home.

The "Bank of Mom and Dad"

New research from the Federal Reserve Board helps confirm reports that homebuyers today rely more on loans and gifts from family and friends to secure a downpayment.

The use of loans and gifts rose sharply during the recession – from 8 percent of homes bought in 2007 to 21 percent of homes bought in 2009, according to the Fed's 2014 Survey of Household Economics and Decisionmaking (SHED). The share has since declined to 13 percent in 2014.

Homebuyers are turning to loans and gifts due to climbing home values, slow income growth and a tight credit market.

The Fed report underscores the challenge younger homebuyers face securing a suitable downpayment, as well as their resourcefulness.

Source: "Selling Stocks to Buy a Home? How to Do It Right," The Wall Street Journal (Oct. 21, 2015); "Homeownership Help: The Growing Importance of the Bank of Mom and Dad," RISMedia (10/25/15) Terrazas, Aaron

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Angelo F. Terrizzi Jr.

I am a New England native, born and raised in the Boston area. Growing up, I was always involved with extra-curricular activities through school and church. I spent 30+ years in Business and later in ....

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