Cobbling Together the Cash to Go Conventional

Five ways to afford a sizeable down payment

The days of "zero down" are all but gone.

A minimum of 10 percent down is getting to be the standard and some mortgage lenders are back to requiring 20 percent down, according to the Mortgage Bankers Association, an industry trade group.

Here are five ways to scrape together the cash and qualify for a conventional loan requiring a sizeable down payment:

1. The Bank of Mom and Dad

Getting money from mom and dad is a time-honored tradition, but lenders won’t let you borrow the money from them and they may be skeptical that the money is really a gift -- even when it is.

Gifts from non-family members are almost never acceptable unless you can document some special relationship.

If you get help from a family member, the lender will ask you to sign a form called a “gift letter,” attesting to the relationship. The lender may also require mom and dad to explain where they got the money and prove that they are financially able to make such a gift. The letter concludes with a declaration that the funds are a gift and will not be repaid. You and mom and dad all have to sign the letter. Learn more about how down payment gifts work.

Instead, Tax Mama Eva Rosenberg, an enrolled agent and financial guru, recommends that mom and dad become investors in your new home. They provide the down payment and also put their names on the mortgage along with yours. Their good credit rating will help ensure that you get the best rate. As you get better established, you can either buy them out or they can forgive a percentage of the loan every year on some date like your birthday. In the meantime, the tax benefits can go to the owners who need them the most, or they can be split.

2. Borrow or deduct it from your retirement account

The law allows individuals to receive distributions from their traditional IRAs to pay up to $10,000 of first-time homebuyer expenses without incurring a penalty -- but you do have to pay the taxes on the money that you take out and this can be a big bite. Rosenberg says if you have an orphaned 401(k) from a former employer, first move it into an IRA then take it out to buy the house.

If you are self-employed or your employer allows it, you also can borrow up to $50,000 from your current 401(k) and pay yourself back over five years at a low interest rate.

3. Ask for it as a wedding gift

National City Mortgage and FeatherOurNest.com are two places that allow you to set up down payment wedding gift registries. If you go with National City -- see your local branch -- you’ll establish a relationship that could expedite the loan. But Feather Our Nest handles the niceties more gracefully. Their acknowledgements and gift cards may keep Aunt Tillie from turning over in her grave.

4. Negotiate a lease/purchase agreement

Homeowners who can't sell their homes in this market will be more amenable to cutting a deal with buyers like you. Under a lease/purchase agreement, you rent the home you want to buy and a percentage of your rent is applied toward the down payment. Specify when you’ll decide to buy and how much you’ll have to pay. It can be a specific price or a percentage of the appraised value of the home at that time. If you don’t exercise your option, you’ll lose that deposit money. In the meantime, the owner doesn’t have to pay taxes on that portion of the rent -- a little deal sweetener. Learn more about lease-purchase options.

5. Set a savings goal

If Grandma could do it, so can you. Use this calculator to figure out how much you have to save for how long to meet your goal. Put aside savings at least quarterly. Expedite the process by getting a part-time job or selling that second car.

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