How To Come Up With Your Downpayment

Not long ago, no-down-payment loans were the height of fashion for homebuyers.

But now that lenders have tightened their standards, borrowers once again are expected to "put some skin in the game," to use the industry's favorite catchphrase. That "skin" refers to the borrower's own cash, and it means down payments are definitely back in style.

The chief advantage of a down payment today is simply that it allows a person to qualify for a loan, since very few so-called "zero-down" loan programs still exist. Yet down payments have other benefits, too.

The more money you put down to buy a home, the smaller your monthly payments will be, explains Greg Gwizdz, national sales manager at Wells Fargo Home Mortgage in Des Moines, Iowa.

A buyer's down payment becomes a homeowner's instant equity when the purchase closes, and that equity can be borrowed against with a home equity loan or line of credit. However, guidelines to qualify for these loans have become much stricter. Gwizdz adds that many first-time homeowners are "surprised by the true cost of owning and maintaining their home" and thus should keep some reserves rather than allocate every dollar to their down payment. Some loan programs require cash reserves for this very reason.

Many homebuyers have difficulty coming up with a down payment. Here are a dozen ways to do it:

* Set up an automatic saving plan.
* Get a gift from your parents, grandparents, other relatives or friends.
* Sell a car, boat, motorcycle, collectibles or other assets.
* Liquidate stocks, mutual funds, savings bonds or other investments.
* Allocate your income tax refund.
* Take a loan from your 401(k) retirement plan and repay yourself with interest.
* Withdraw funds from your 401(k) plan, subject to taxes and penalties.
* Collect on a loan that you made to someone else.
* Get a bonus from your employer.
* Explore homebuyer programs for teachers, police officers, firefighters and other public servants, if you qualify.
* Apply for a state or local government homebuyer down payment program.
* Use a private down payment assistance program.

A down payment needs to be "sourced and seasoned," Gwizdz says. That means the lender needs to know how you obtained the funds and that you've had control of those funds for at least several months. Gifts and seller's concessions are acceptable, up to the percentage allowed by the loan program, but borrowed money can't be used as a down payment because it is debt that has to be repaid.

Two government-run programs are designed to aid homebuyers who haven't saved much for a down payment. The Federal Housing Administration, or FHA, offers mortgage insurance that allows qualified buyers to purchase a home with a 3-percent down payment, all of which may be a gift. The U.S. Department of Veterans Affairs offers a home-loan guarantee program that helps military veterans buy a home with no down payment.

Down-payment programs run by state and local housing authorities offer grants and low-interest deferred-payment loans to homebuyers, though the restrictions can be "pretty severe," says Ed Craine, CEO of Smith-Craine Finance, a mortgage company in San Francisco. Some programs require borrowers to live in a disadvantaged neighborhood. Others have income limitations, for example.

"The biggest problem tends to be that if you make enough money to qualify for a loan, you probably make too much money to get the down-payment assistance," Craine says.

Down-payment assistance programs offered by private organizations -- Nehemiah Corp. and AmeriDream are two of the largest -- convert money contributed by the seller into the buyer's down payment."They are using the seller's equity to fund a grant which allows the buyer to buy with no money down," says Peter Thompson, a senior loan officer with Professional Mortgage Partners in Downers Grove, Ill.

These programs "serve a need for people who struggle to save a down payment, if the seller is motivated to contribute," Gwizdz says. But these programs are not without controversy. The down payment is of value only if the homebuyer can afford the monthly payments, he says, and whether someone who didn't have the discipline to save a down payment would have that discipline to make the payments may be questionable.

The FHA has tried, so far unsuccessfully, to ban the use of private down-payment programs in conjunction with FHA loans. That's because FHA-insured loans that used these programs had a significantly higher incidence of default and foreclosure than loans that didn't use such assistance, according to an FHA study.