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Ways to leap over the down-payment hurdle

Today is a frustrating time for renters who want to buy homes but who haven't saved much for down payments. Mortgage rates are on the rise, houses aren't getting cheaper and it seems like time is running out.

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"It would take me at least another year or two to save another $10,000 to $15,000, and, frankly, I want to purchase a house before the costs are out of reach," e-mails a reader from Long Island, where the median house price rose more than 20 percent last year.

He has more options than he realizes. There are myriad ways to leap the down-payment hurdle. Some strategies are for people who have some money saved up somewhere, and other strategies are for people who are practically broke.

It has been a long time since home buyers were required to come up with 20 percent down. Some lenders will lend 100 percent of the purchase price or even 103 percent. More commonly, lenders underwrite mortgages with 3 percent or 5 percent down. The question becomes: How do you come up with that 3 to 5 percent?

Dig into the nest egg?
You could tap your retirement savings, either borrowing from a 401(k) account or withdrawing money early from an Individual Retirement Account.

When you borrow from your 401(k), you repay the loan over five or more years, with interest. Most 401(k) plans will let you borrow up to $50,000 of your balance or 50 percent, whichever is less.

One problem with borrowing against your 401(k) is that you will have to repay the loan within 90 days of losing your job or quitting. That can make a layoff even more stressful, and can serve as a pair of golden handcuffs that chain you to your job, even if a better one comes along. If you can't repay the loan in time, you have to pay penalties and taxes on an early disbursement.

An advantage of borrowing against a 401(k) is that it doesn't count as debt when lenders assess your qualifications for a loan, says Ellen Bitton, president of Park Avenue Mortgage in New York City.

Withdrawing money from an IRA can be a good strategy for first-time home buyers You pay taxes on the disbursement, but a 10-percent early-withdrawal penalty is waived if you use the money to buy your first home. Some advisers warn against removing money from a retirement nest egg.

"But," says Bitton, "in the long run, you'll probably have more appreciation on the money invested in real estate." She pauses, then adds with a laugh, "And maybe not. There are no hard-and-fast rules."

Borrowing against retirement savings is fine for people who have money set aside for their golden years. But what about people who have virtually no money in the bank?

Gifts from family and friends
Some loan programs allow borrowers to use gift money to make down payments. Generally, the gifts have to come from family members, spouses or domestic partners, or nonprofits.

-- Posted: April 17, 2003




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