real estate

How to Deal With a Down-Payment

When a 20% down payment seems out of reach, try these low-down options.

Considering a home purchase? Ideally, you'll want to put 20% down toward a new home so you can avoid paying private mortgage insurance (PMI), which protects the lender's interest if you can't make your payments and default. Mortgages backed by Fannie Mae and Freddie Mac generally require a minimum down payment of 5% to 10% for a conforming mortgage (of $417,000 or less) and 10% to 15% for a super-conforming mortgage (up to $625,500 in high-cost areas). But you may have some additional options:

Put down just 3%. Fannie Mae and Freddie Mac recently resurrected loan programs that allow just 3% down on a fixed-rate mortgage with PMI. For Fannie's program, at least one borrower must be a first-time home buyer. Fannie's program launched in December 2014 and Freddie's will be available to borrowers whose loans settle on or after March 23, 2015.

Take an FHA loan (backed by the Federal Housing Administration). FHA loans have been popular not just with credit-challenged borrowers but also with prime borrowers looking for low down payments. The FHA requires a down payment of just 3.5%. To qualify for maximum financing, you must have at least a 580 credit score (although some lenders may overlay a stiffer requirement). However, you must pay an upfront mortgage insurance premium at closing and a monthly premium, too, which may make this loan more expensive than going with one backed by Fannie Mae or Freddie Mac.

Loans with no down-payment have not made a comeback, but "piggyback" arrangements, with an 80% first mortgage, a 15% second mortgage or home-equity line of credit and a 5% down payment are coming back.

Investigate state and local programs for low- and moderate-income families and for first-time buyers. You may be able to get a lower-rate mortgage with a small down-payment requirement. Check what's available through any lender or real estate agent, or through your state or local housing agency. To find state housing finance agencies in your region, consult the directory at the National Council of State Housing Agencies.

VA loans (guaranteed by the U.S. Department of Veterans Affairs). If you are a qualified service member or veteran, you won’t need a down payment—or mortgage insurance (see www.benefits.va.gov/homeloans).

Rural Development loans (guaranteed by the U.S. Department of Agriculture) allow qualified, low-income borrowers in selected areas to buy with nothing down, although they will pay an upfront guarantee fee (rolled into the loan amount) and an annual fee (see www.rurdev.usda.gov/hsf-about_guaranteed_loans.html).

Consider buying a less expensive condo or house that needs fixing up. A home inspector can help assess the degree of work required so you can estimate the amount of time, expertise and money you will need to invest. However, if the home needs too much work, you may have to seek special financing.

Rent using a lease-option contract, which gives you the right to live in the house for a period of time and the right to buy the property for a specified price. But remember that the homeowner may require an up-front payment that you will forfeit if you ultimately don't buy the property.

Look for a property whose seller is willing to act as the lender. You don't have to meet institutional credit standards and may be able to work out a better deal. Just make sure that you run the agreement by a real estate lawyer to ensure your rights are protected.

Consider an equity-sharing purchase with a family member who is willing to make the down payment, or arrange a gift from family or friends. Again, the agreement should be in writing, and lenders will require written assurance that a gift isn't really a loan in disguise.

Consider a penalty-free IRA withdrawal for a first home. You can withdraw up to $10,000 from your IRA without paying a penalty, regardless of your age, to help pay for a first home for yourself or a family member (such as a spouse, child, grandchild, parent or grandparent). If you're married, you and your husband or wife can each take $10,000 from your IRAs penalty free for a first-time home purchase. However, the money will be fully taxed in your top bracket (except to the extent that the withdrawal represents nondeductible contributions -- money on which you paid federal income taxes on before stashing it in the IRA).

Roth IRAs offer an even better deal for first-time home buyers: You can withdraw 100% of your contributions tax- and penalty-free at any time (for first-time home purchase or anything else). On top of that, you can take up to $10,000 of earnings penalty free for a first-time home purchase. And, if your Roth has been opened for at least five years, those earnings are tax-free, too.

Your 401(k) is a good source for a home loan. You can generally borrow up to half of your balance, up to a maximum of $50,000, from the account at any age and for any reason without tax or penalty. And the interest you pay on the loan (generally the prime rate plus one or two percentage points) goes back into your account. You must usually pay back the loan within five years, although your employer may give you up to 15 years if you used the money to buy a home. For more information, see Borrowing From Your 401(k) to Buy a Home.

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