Cash Upfront: Overcoming The Down Payment Hurdle

Not so long ago, no down payments or small down payments were the norm. Now, many lenders require 10 percent or more as a down payment, depending on the loan type and credit score. “Piggyback” loans—that allow borrowers to avoid mortgage insurance—are becoming scarce as well.

Although building up a nest egg seems like the logical solution, in reality, many borrowers simply don’t have enough funds to save up for a down payment. Fortunately, there are other ways to come up with enough cash.

FHA-backed loans. In 2007, FHA loans accounted for 8.4 percent of all accepted mortgage applications. One year later, that number rose to 29.1 percent. The reason for this increase is partly due to the low down payment requirements: If you qualify for an FHA loan, your down payment will be 3.5 percent.

Government programs. Although most government assistance programs are for low- to moderate-income borrowers, there are programs and grants available to a wider range of borrowers. If you don’t qualify for this low-income assistance, check with your state or local government and see what options they provide in terms of down payment assistance.

Gifts from friends or family. Almost all lenders will accept monetary gifts from friends, family, or other outside sources. Asking your friends or family to help you with your down payment may be difficult and awkward, but if you do have a trusted friend or family member, it may be something to consider.

Borrow against your 401(k) or IRA. Most 401(k) plans or retirement accounts allow you to borrow money from your account and pay back the amount with interest over a set period of time. However, early withdrawal penalties may apply in some situations and tapping these accounts may not be the best for you financially. You’ll want to talk to a financial planner before you borrow against your 401(k) or IRA.

The new tax credit. With the new $7,500 tax credit for first-time buyers, you may be able to get the credit upfront by adjusting your income tax withholding. However, be forewarned: Much like borrowing against your 401(k), you should talk to a financial planner before you put your tax credit towards your down payment. There are risks and possible penalties involved.

In the end, if you are able to save up enough cash for a down payment you should definitely take that route. As always consult with your mortgage professional to see what options you have in terms of your down payment.  ∆