How To Buy A Home Without A 20 Down Payment

Dated: 02/02/2016

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Home prices are on the rise, making it harder for buyers to cobble together a 20% down payment.


But there are options for buyers who don't have that kind of cash sitting in the bank.

1. Apply for an FHA loan

The Federal Housing Administration backs mortgages that require as little as 3.5% down.

Anyone can apply, though you'll usually need good credit.

Plus, you'll need to pay mortgage insurance on the loan in addition to your principal and interest, which raises monthly payments even more.

But those extra payments are lower than they once were. At the start of 2015, the government reduced mortgage insurance premiums on some FHA loans,

 which increased the pool of borrowers.

"The fee change made more people see the FHA option as a financial alternative.

2. Look to see what Uncle Sam offers.

The Department of Veteran's Affairs guarantees home loans with 0% down for current and former service members.

The loans come with competitive interest rates and no private mortgage insurance premium, but borrowers could pay some fees at closing.

The Department of Agriculture has a home loan program to increase homeownership in more rural and less-populated areas.

 USDA loans do not require putting any money down, but there are eligibility requirements, including income and property size.

Many cities and municipalities offer down payment assistance programs to help potential buyers.

3. Ask family members for a loan.

Tapping a relative for a large sum of money can be awkward, but setting up a loan is sometimes an enticing offer for both parties.

With many retirees earning very little interest on their money, a personal mortgage can offer a steady stream of income.

"If a parent has the money in an interest-bearing account earning darn near zero, this might be an option to increase their yield and help their child out at the same time.

Experts advise laying out the loan terms, including a payback schedule and interest rate, in writing. To make a loan legitimate to the IRS, the interest rate needs to be comparable to what banks charge.

"Consider your child a junk bond ... take a 10-year Treasury note yield and add two to three percent," advised Timothy Watters, certified financial planner at Watters Financial Services.

Buyers will have to disclose all loans to their mortgage lender.

4. Get the money gifted

Some well-off parents would rather see their inheritance money in action while they're still alive.

The gift tax is currently $14,000 per person, which means a parent can give a married couple up to $28,000, without triggering taxes.

Borrowers that go this route will have to provide their mortgage issuer with a letter from the giver that states the money doesn't have to be repaid, and may need to show their financial statements as well.

5. Dip into retirement funds ... cautiously

Another place to look for the money: try tapping your retirement account, if you have one. But use caution to avoid paying penalties.

Some 401(k) plans allow participants to take out 50% of their vested balance (up to $50,000) as a tax-free loan. The loan needs to be repaid on a given timeline -- usually five years. But there's a big caveat: If you leave the company before the loan is paid back, you will likely owe the entire balance within 60 days. If you can't pay, the amount will be treated as an early withdrawal and you'll owe regular income taxes, plus a penalty.

Qualified first-time home buyers can also tap a traditional IRA account up to $10,000 without facing the 10% penalty. You will pay taxes on the amount withdrawn. If you have a Roth IRA and it's been open for at least five years, the distribution (up to $10,000) is tax free. Roths also allow you to withdraw your contributions for any reason without incurring tax or a penalty.


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