Getting the Down Payment

Buy A Home Of Your Own

You might find that you can easily afford the monthly maintenance of a home (including the mortgage payments and upkeep of the property). But you just can't seem to stockpile that initial down payment. Consider applying for a mortgage insured by the Federal Housing Administration (FHA) (www.hud.gov/buyhome.html). The minimum down payment required by the FHA is less than 5%. (To qualify, the mortgage amount must fall below specified limits.) For more information, visit a local Housing and Urban Development (HUD) office or call the Housing Counseling Counseling Clearinghouse at 800-217-6970.

Depending on your family situation, you may be able to borrow some of the needed funds from a relative. Many first-time home buyers receive at least some financial assistance from relatives or friends.

Your family may simply gift you the money. A signed letter must be given to the mortgage lender, however, stating that this gift does not have to be repaid. Or, your family may grant you a loan (just as a bank or another financial institution would). The Internal Revenue Service requires that a minimum amount of interest be charged on loans greater than $10,000, depending upon the financial status of the borrower. You can still deduct the interest—no matter how small the amount—on your annual tax return if the loan is secured by your home. The FHA also permits borrowing from a family member, but such a loan may be subject to certain repayment restrictions and may be recorded as a second mortgage.

You may also use your parents' bank account balance (if they are willing, of course) to help you get a mortgage. Certain banks and brokerage houses allow these balances to serve as collateral for the down payment. If you, the buyer, have adequate income to qualify for the mortgage—but just don't have the money for the down payment—you can obtain up to 100% financing. Your parents must leave their account with the lender until you've paid a certain amount back or there is enough equity in the home to cover a specified percentage of the amount borrowed.

Another option would be to borrow money from your 401(k) plan. Although it's generally not a good idea to sacrifice your retirement savings to buy a house, this type of loan can be very attractive if you don't have any other options. (Keep in mind that the interest you pay is not tax deductible.) Since you're essentially borrowing your own money, you pay the interest back to yourself. A loan won't stop your retirement nest egg from growing—unless you don't repay the loan. Your growth on the borrowed funds is limited to the amount of interest that you're paying yourself, however, so you may miss out on a run-up in the stock market that you could have benefited from had you invested that money in equities instead. Generally, you can borrow up to 50% of your 401(k) account assets up to $50,000, and, depending upon your plan, can take up to 30 years to repay the funds. If you don't pay the money back (which is required if you change jobs), however, you'll have to pay income taxes—plus a possible 10% early withdrawal penalty if you are under age 59½—on the funds not paid back.

If your job provides a significant bonus, which may be larger than your expected salary increases, invest these bonuses over several years instead of using them to buy things right away. This could help get you partway to your goal. If you invest your annual bonus each year (you have $2,000 available, let's say, after tax) and earn 10% annually on that investment, you will have $13,431.22 in 5 years (see Figure 1.5).

As a final option, you may want to consider a final possibility: a roommate. If you can afford it, it is probably best to buy the home yourself and simply charge your roommate rent. (You could also buy a home that has a rental unit set up.) That additional cash flow will help offset your current mortgage, tax, and insurance costs, but it will bypass the problem of joint ownership if you and your roommate decide to part company. This arrangement also lets you buy a place you can grow into. Many married couples similarly stretch themselves economically in the early years of home ownership because they want to avoid the hassle, and expense, of trading up to a larger house in a few years. This same strategy works for a single person on a career path with an expected increase in income at a decent pace over time.

Your E&Y Planner Says:

If you can't come up with a 20% down payment, many lenders will allow 10% down but require that you buy private mortgage insurance (PMI). This can be quite costly. You don't need this insurance once the mortgage falls below 80% of the home's value. Most mortgage holders, however, don't automatically drop the insurance once you have 20% equity built up in your home. You have to arrange with them to terminate the PMI. This may entail an appraisal of your property.

Excerpted from "Ernst & Young's Financial Planning for Women" with the permission of the publisher John Wiley & Sons, Inc. Copyright ©1999 by Ernst & Young LLP. This book is available at all bookstores and from the Wiley Web site at www.wiley.com, 1-800-225-5945.

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