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Don't Have 20 Percent Down? Don't Worry!

Buyers find lots of reasons to lose sleep when purchasing a home, but coming up with a 20 percent down payment shouldn’t be a source of anxiety.

In the days before government groups guaranteed mortgage loans, lenders usually required 20 percent down payments so buyers would have some skin in the game – equity –and incentive to keep paying down their mortgage debt.

Today, however, lenders can accept less than 20 percent down payment because a myriad of government agencies will guarantee the loans under specific conditions. And even if your lender requires 20 percent down, there are ways of raising that money without tapping out your savings.

Here are some ways you can handle a down payment so you can buy the house you love.

Receive a Gift

In 2012, 14 percent of all home buyers and 24 percent of first-time buyers received a gift from family and friends to help pay for a down payment, according to National Association of Realtors 2012 Profile of Home Buyers and Sellers.

That’s OK with most lenders if you’re buying an owner-occupied property, though it often doesn’t fly for investment properties. Lenders do, however, want to know that the down payment truly is a gift, not a loan in disguise, and they’ll need to be assured that you have enough income to support monthly mortgage payments without help from Mom and Dad.

If you’re lucky enough to have someone in your life willing to give you such gifts, beware the federal gift tax. This kicks in on gifts of more than $14,000 to any one person. However, both parents can give you and a spouse/partner up to $56,000 a year without incurring the gift tax. (This breaks down to $14,000 from each parent, given to you and to your spouse as individuals.)

After a single year, this $56,000 could translate into a big down payment and a lot of thank you notes to write.

Federal Housing Administration (FHA) Loan

What if you don't have friends or family willing to send you a large gift?

An FHA loan is a mortgage that's insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. The loan itself is issued by a lender (such as a bank), but insured by the FHA against default.

If you borrow through the FHA you’ll pay for mortgage insurance, which protects lenders from loan defaults. The upfront premium is 1.75 percent of the loan amount; this can get rolled into the loan.

The ongoing premium (known as the 'annual premium,' though it's paid monthly) is 0.80 to 0.85 percent on a 30-year loan, depending on the down payment amount.

Because the loan is insured, lenders offer FHA loans to people with less stellar credit and those who can afford only a low down payment. Eligible homebuyers can use FHA-backed loans to take out a loan that's as low as 3.5 percent.

Veterans Administration Loan:

The VA loan is a mortgage option for more than 22 million active duty military and veterans.

These loans are made through private lenders and are guaranteed by the Veteran’s Administration. VA loans require zero percent down, meaning that people with no down payment can still buy a home. Another plus: VA loans don’t have to be insured, which can save you the cost of the mortgage insurance. According to Bankrate figures, this will save you around $100 per every $100,000 worth of mortgage.

United States Department of Agriculture Rural Development Loan:

USDA loans give low- and moderate-income people a chance to own a home by assisting approved lenders to grant 100 percent financing.

The program requires that the home is located in less-developed places in the country, which helps communities and homeowners alike. The loans are insured by the U.S. Department of Agriculture, require no money down and can come with lower-than-average mortgage rates, depending on the lender.

Tap Your IRA:

The IRS allows a first-time home buyer to withdraw a limited amount of funds without paying the 10 percent penalty that usually comes with withdrawals before age 59- 1/2 years.

This sounds good, until you realize that the maximum exemption is $10,000, which won’t help much if you’re buying a home in an area where property values are high.

However, if your money is in a Roth IRA that you’ve maintained for at least five years, you may be able to withdraw more money. In addition to being able to withdraw $10,000 of earnings (gains), you can also withdraw your principal portion (your contributions) of the Roth IRA penalty free, because you’ve already paid taxes on that money. On a traditional IRA, in which you defer taxes on contributions, you have to pay taxes and a penalty on any money you withdraw.

You have lots of ways to come up with the down payment needed to buy a home.

But remember: just because you can qualify to buy a home doesn't mean you necessarily should. Will you be able to afford this home month-to-month? If not, reconsider your move. But if you can afford the monthly payments, and you want to buy a home to build equity and establish roots in your community, then enjoy your new home. 

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