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With current mortgage rates nearing all-time lows and home prices continuing to climb, you want to "get while the gettin's good!" But accumulating enough for a down payment on your first home can be one of the toughest financial challenges you'll face.

The traditional down payment requirement used to be 20 percent of your home's purchase price. However, lending rules have changed recently, so you may be able to put down less (5 or 10 percent) to qualify for a mortgage. But keep in mind that if you put less than 20 percent of the purchase price down, you may also have to obtain private mortgage insurance (PMI) that protects the lender.

If you were to ask around, friends and family may tell you that, in order to make their down payment, they:

  • Cashed out some stock options from their employers

  • Worked a second job and saved, saved, saved

  • Leased their home with an option to buy it

  • Borrowed money from family or friends

The method of coming up with a down payment that's best for you will vary according to your circumstances. Let's explore your options:

  1. If you have an IRA, you can withdraw money from it. As long as you use the money for first-time home buyer costs, you won't have to pay the 10 percent penalty for withdrawals before age 59-1/2. However, you will lose the tax-advantaged earnings this money provides, so consider other options first. Also, since there are lots of rules governing IRA withdrawals, check with your tax adviser before withdrawing any money.

  2. If you have a 401(k) at work, you can borrow from the equity you have in it. You will be charged prime rate and possibly more. And don't forget to repay your retirement fund through payroll deductions.

  3. Build up your savings by having a set amount automatically withdrawn from your checking account each month and transferred into a separate savings account designated for your down payment. This forced savings plan will work to move you closer to your goal of home ownership, but you'll need to wait awhile to accumulate enough money. The downside is that both interest rates and home prices could escalate during this time.

  4. You could get what's called an 80-20 mortgage. This is a loan for 80 percent of the home's purchase price and a separate loan for the other 20 percent. This is risky, however, since you're borrowing 100 percent of the home's purchase price and if the market should drop, you'll end up owing more than the home is worth.

  5. A loan from your parents or other relatives may be the best route for you to take. This can also be the quickest way for you to get into a home and offer the best interest rate for repayment.

If these options fall short of helping you reach your goal of home ownership, don't despair. There are special mortgages and first-time home buyer programs available. Start by asking your credit union whether they offer conventional mortgages with low down payments in conjunction with Fannie Mae, Freddie Mac or nonprofit or government agencies.

Saving up enough money for a down payment is a challenge, yet it is the first step towards making one of the most important purchase and investment decisions of your life.

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All information provided through this site is intended to be accurate. However, there may be inaccuracies from time to time which we will make every attempt to correct immediately. Information provided is intended to assist you in making decisions and does not eliminate the need to discuss your particular circumstances with a qualified professional.
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