Coming Up With a Down Payment

Your mother wants you to be in a new house, you want to be in a new house, and Uncle Sam wants you to be in a new house.

But many homebuyers find their greatest challenge is coming up with down payments from their modest savings accounts. You don't have to be a Rockefeller to do it, but almost: In some escalating real estate markets, $20,000-60,000 down is the norm.

With creative solutions - through both private and public money - you won't have to give up your firstborn to get into a new home. Here are some options:

A gift from Mom and Dad. They can each give $12,000 to anyone once a year without gift tax implications. If you plan ahead, you could be squirreling family money away years in advance of needing the home loan.

A loan from Mom and Dad - or from other family members. National Association of Realtors data indicate that almost 10% of first time home buyers will fund their downpayment with a loan from family members or friends. They can loan you any amount.  Friends and family members are generally more flexible than banks when it comes to mortgage terms. Interest you pay is tax deductible, just as it is with any other mortgage.

Individual Retirement Account. First-time homebuyers may dip into their IRAs without penalty. You pay taxes on the money you withdraw and earmark for your house, but you are not subject to the usual 10 percent early-withdrawal penalty. A nice break from Uncle Sam.

401k. You can borrow up to $50,000, or 50 percent of your 401k, whichever is larger. Many 401k plans now allow this "loan to yourself." Unlike using your IRA funds, you must pay back the 401k loan over five or more years through payroll deductions, so keep in mind that you won't have the same paycheck you did before the loan.  Many financial experts advise you to consider this only as a last resort. One caution here: If you leave or lose your job, you must pay back the loan in 60 days or pay a whopping tax bill.

FHA loan. These federally-insured loans allow you to purchase a home with as little as 2-3 percent down. These loans require mortgage insurance and are often at higher interest rates than a conventional loan, but if the down payment is your big obstacle, the mortgage insurance might be the ideal trade-off.

Zero down and other creative mortgage types. See Understanding Mortgage Types for an assortment of loans designed to get you into a house now - and pay for it later.

Seller financing. Another option to ease the down payment load is to consider one of many seller-financing arrangements:

• Seller carry back: The seller can assume a second mortgage, or  "carry back" all or a portion of the mortgage to make up the difference. (The downside to this arrangement is that the buyer has two mortgage payments: one to the primary lender and the second one to the seller - sometimes at a higher interest rate. The buyer might also be required to make a large balloon payment to the seller within a few years.)

• Lease with an option to buy (aka rent to own). Lease options generally require less money down. Some sellers will require option payments, and this and the additional monthly payments (above the rent) go into a down payment kitty for the future purchase. In this scenario, you and the seller agree upon the future purchase price and the terms of the lease, but you are still the renter. The advantage in a steadily rising market is that you are locking in the future home price today. Conversely, if the market goes south, you will be forced to choose between a home that has declined in value, or lose all of the money you invested above and beyond the rent payment. One of the benefits to the seller in this arrangement is they get the benefit of charging higher rent than they might otherwise get in the neighborhood. See Rent To Own Explained.

• Contract for deed (also called an installment land contract). The buyer takes possession of the home right away, but does not get the deed and title until a certain number of payments, or installments, have been made.

• Seller mortgage. The seller may also carry the entire mortgage and you simply pay one mortgage payment to him. The upside of this arrangement is that it reduces your cash outlay and alleviates expensive closing costs. The terms of the loan, such as payment schedule and interest rate, are mutually agreed upon and specified in a written contract.

For example ...

Seller financing is a viable solution for those who cannot qualify for a loan or don't have the ideal down payment:

Home purchase price: $175,000
Down payment: $5,000
Bank loan: $120,000
Seller loans the balance: $50,000

• Second mortgage. A loan program called 80-10-10 allows buyers who can't make a 20 percent down payment to put down 10 percent, borrow 80 percent on the first mortgage, and borrow the remaining 10 percent as a second mortgage, or "piggyback" loan. These secondary loans are offered at a higher interest rate, but offer flexibility.

• Bridge loan. For homeowners who are trading up, it's possible to end up owning two homes for a short period. A bridge loan allows them to borrow money short-term to pay off their existing mortgage, and use what's left for the down payment and closing costs for the new home. These loans typically have a one-year term.