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Smaller Down Payments

Especially if you're just starting to save, 20 percent of a property's purchase price as a down payment plus closing costs can seem like a financial mountain. Here are some down payment options to consider:

  • Boost your savings rate. Say that you want to accumulate $30,000 for your home purchase, and you're saving just $100 per month. At this rate, it will take you nearly two decades to reach your savings goal! However, if you can boost your savings rate by $300 per month, you should reach your goal in about five years.
  • Being efficient with your spending is always a good financial habit, but saving faster is a necessity for nearly all prospective homebuyers. Without benevolent, loaded relatives or other sources for a financial windfall, you're going to need to accumulate money the old-fashioned way that millions of other homebuyers have done in the past: by gradually saving it. Most people have fat in their budgets.
  • Set your sights lower. Twenty percent of a big number is a big number, so it stands to reason that 20 percent of a smaller number is a smaller number. If the down payment and closing costs needed to purchase a $150,000 home are stretching you, scale back to a $120,000 or $100,000 home, which should slash your required cash for the home purchase by about 20 to 33 percent.
  • Check out low-down payment loan programs. Some lenders offer low-down-payment mortgage programs where you can put down as little as 3 to 10 percent of the purchase price. To qualify for such programs, you generally must have excellent credit and purchase private mortgage insurance (PMI). In addition to the extra expense of PMI, expect to get worse loan terms -- higher interest rates and more up-front fees -- with such low-money-down loans. Check with local lenders and real estate agents in your area.
  • Unless you're champing at the bit to purchase a home, take more time and try to accumulate a larger down payment. However, if you're the type of person who has trouble saving and may never save a 20 percent down payment, buying with less money down may be your best option. Be sure to shop around for the best loan terms.
  • Access retirement accounts. Some employers allow you to borrow against your retirement savings plan. Just be sure that you understand the repayment rules so that you don't get tripped up and forced to treat the withdrawal as a taxable distribution. And, thanks to the 1997 tax law changes, you are now allowed to make penalty-free withdrawals from Individual Retirement Accounts for a first-time home purchase.
  • Get family help. Your folks or grandparents may like, perhaps even love, to help you with the down payment and closing costs for your dream home. Why would they do that? Well, perhaps they had financial assistance from family when they bought a home, way back when. Another possibility is that they have more money accumulated for their future and retirement than they may need. If they have substantial assets, holding onto all these assets until their death could trigger unnecessary estate taxes. A final reason that they may be willing to lend you money is that they are bank-and-bond-type investors and are earning paltry returns.

If your parents or grandparents (or other family members, for that matter) broach the topic of gifting or lending you money for a home purchase, go ahead and discuss the matter. But in many situations, you (as the prospective homebuyer) may need to raise the issue first. Some parents just aren't comfortable bringing up the topic of money or may be worried that you'll take their offer in the wrong way.

  • Look into seller financing. Some sellers don't need all the cash from the sale of their property when the transaction closes. These sellers may be willing to offer you a second mortgage to help you buy their property. In fact, they often advertise that they're willing to assist with financing. Seller financing is usually due and payable in five to ten years. This gives you time to build up equity or save enough to refinance into a new, larger 80 percent conventional mortgage before the seller's loan comes due.

Be cautious about seller financing. Some sellers who offer property with built-in financing are trying to dump a house that has major defects. It's also possible that the house may be priced far above its fair market value. Before accepting seller financing, make sure that the property does not have fatal flaws (have a thorough inspection conducted) and is priced competitively. Also be sure that the seller financing interest rate is as low or lower than you can obtain through a traditional mortgage lender.

  • Check out 80-10-10 financing. It's called 80-10-10 because a bank, savings and loan association, or other institutional lender makes a traditional 80 percent first mortgage and you get a 10 percent second mortgage and make a cash down payment equal to 10 percent of the home's purchase price. Where can you get the second mortgage? Either from the institutional lender who provided the 80 percent first mortgage or the previously mentioned seller. From a lender's perspective, 80-10-10 financing is as good as 20 percent down.
  • Get partners. With many things in life, there is strength in numbers. You may be able to get more home for your money and may need to come up with less up-front cash if you find partners for a multi-unit real estate purchase. For example, you could find one or two other partners and go in together to purchase a duplex or triplex.

Before you go into a partnership to buy a building, be sure to consider all the "what ifs." (What if one of you wants out after a year? What if one of you fails to pay the pro-rata share of expenses? What if one of you wants to remodel and the other doesn't? And so forth.) Have a lawyer prepare a partnership agreement that explicitly delineates how issues like these will be dealt with. Otherwise, you could face some major disagreements down the road, even if you go in together with friends or people you think you know well.