Dodging the Down-Payment Obstacle

The requirements are steeper, but there are ways you can rustle up enough cash to buy a home.

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With rock-bottom sale prices and the lowest mortgage rates the country has seen in decades, many experts say this could be one of the best times to buy a home. Indeed, according to a recent Trulia survey, buying a home is now less expensive than renting in almost 80 percent of America's major cities.

To be sure, many obstacles confront prospective home buyers, including stricter credit standards and more extensive documentation requirements, but it's the hefty chunk of change consumers need to secure financing that's standing in the way for many would-be home buyers. These days, many banks require a down payment of 15 percent or more for mortgages, a staggering amount for many first-time home buyers.

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But house hunters struggling to come up with the cash for a down payment may have more options than they realize. While the government intends to dial down its role in the housing market in the coming years, state and federal programs to help out home buyers still exist. Consumers can also leverage existing assets and personal finance techniques to accumulate the capital needed.

Here are seven ways would-be home buyers can get their hands on the down payment cash they need to close the deal on a home:

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Check out state programs. Although offerings vary by state, local housing finance agencies can help consumers come up with their down payments. Such agencies assist first-time buyers by providing grants, subsidized home loans, and other programs. Buyers must meet requirements on credit, income, and home sales price, but the Virginia Housing Development Authority, for example, can provide eligible first-time buyers with federally-insured home loans that include second mortgages to cover the down payment and closing costs. To find out if you qualify for similar assistance, contact your local state housing finance agency.

Check out FHA programs. It's a common misconception, but the Federal Housing Administration is not a lender. A federal agency, the FHA insures private lenders against default, which makes obtaining a loan much easier for consumers. Qualified borrowers can access FHA-backed mortgages for as little as 3.5 percent down. The agency backs about a quarter of new home-purchase loans today, up from just 3 percent in 2006. FHA-backed loans are subject to credit and mortgage-size requirements. To see if you qualify, contact an FHA-approved lender near you.

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Start a savings plan. It might take some time and patience, but the wonders of old-fashioned compound interest can help consumers cobble together enough cash for a down payment. For assistance in creating a savings plan, consider contacting a certified credit counselor.

Get a second job. Additional income, of course, can also help would-be home buyers save enough cash for a down payment. But with the national unemployment rate at 9.2 percent, jobs are scarce. Still, it's worth investigating any freelance work you might be able to take on, or checking to see about any part-time openings in retail.

Cash gifts. If you don't have enough down-payment cash on hand, see if anyone close to you does. Gifts from parents or other family members have long been a source of down-payment cash for young couples or first-time buyers. Keep in mind that financial gifts must be documented in writing with an express statement by donors saying there is no obligation to repay the money. Also, cash gifts from a single source that exceed $13,000 per individual—or $26,000 per couple—are subject to federal taxes.

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Tap your IRA. Financial advisers caution against using retirement assets to purchase a home and recommend exploring all alternatives before tapping into an IRA. However, certain home buyers can use funds from their IRA to cover a down payment without incurring the 10 percent early withdrawal penalty. Individuals under age 59½ who have not owned a home within the preceding two years can withdraw up to $10,000—penalty-free—from their IRA to put toward a real estate purchase. The cash can be used for acquisition, financing, or closing costs associated with the purchase.