Don't Be Afraid Of The Down Payment

“Yes, I know I should buy a house instead of renting, but I just can’t afford it right now.”

Sound familiar?

With such a good real estate market, many people want to buy now, but feel that they either don’t have enough for a down payment or can’t save fast enough for a down payment. Fortunately, the days of 20 percent down are pretty much a thing of the past. Although many lenders require three to five percent as a down payment, there are ways of getting around this down payment or coming up with the cash creatively.

No down payment.  Some lenders now offer no down payment loans. Put simply, a no down payment loan means you are financing 100 percent of the value of your new home. Although this type of loan may be best for your current financial situation, be forewarned: such loans often require private mortgage insurance and many lenders do not offer no down payment loans for jumbo loans (loans for a certain amount or higher).

Small down payment.  To avoid mortgage insurance, you may want to consider getting a “piggyback loan,” which is a separate home equity loan on top of a primary mortgage. For example, you can get a mortgage for 80 percent of the home’s value plus get a 20 percent home equity line of credit. Also, some lenders do offer 100 percent financing piggyback loans. Much like no down payment loans, however, many lenders do not offer these for jumbo loans.

“Gifts” from friends, families, or non-profits.  Most lenders accept monetary gifts from a buyer’s friends or family. Also, non-profit organizations have recently jumped into the lending process by offering special programs for buyers: the home’s seller “donates” a certain percentage of the sale price (plus a fee) to the non-profit and the non-profit then turns around and gives the buyer that percentage as a down payment at closing.

Borrow against your 401(k) or IRA.  Borrowing against your 401(k) can be a good tactic because it does not count as a debt when a lender assesses your finances. Most plans allow you to borrow up to $50,000 or 50 percent of your balance, which is ideal for a down payment. However, keep this in mind: if the rate to pay back the 401(k) loan is higher than the rate on a mortgage loan, it won’t make sense to borrow against your 401(k). For a loan against a retirement account, you will pay taxes on the disbursement, but if you use the money for a down payment on your first home, any early-withdrawal penalties will be waived.

No matter what route you take, make sure you weigh the advantages and disadvantages to all different types of loans you are considering. With a low down payment or no down payment you will start with very little equity in your new home. As always, consult your lender or mortgage professional to find a loan that is best for you.  ∆