For Buyers

Saving to Buy a Home

Loans and Down Payments

"Neither a borrower nor a lender be" could be translated as: Maybe it's time to stop renting (borrowing) and buy a home of your own. But how do you know what you can afford? And how do you make the leap from renter to good loan risk? There are many types of loans, but there are two main criteria for qualifying:

Good credit. A good credit history with no or low debt is the ideal. Even if you're way ahead of the repo man, if you're carrying high debts you need to reduce them. Contact creditors and establish realistic payment schedules. Start paying new bills on time and in full. If it takes a year to get your debts under control, put off house-hunting, find the bliss of discipline, and know it will be a year well-spent.

Income. Have you held your current job for at least two years? As a loan prospect, you're considered a better risk if you have a low but steady income rather than a short-term higher income. Will you be secure (and content) for the next three years? Are you confident in your company's stability?

Speed up your savings savvy
Let's start with the main chunk of change: the down payment. There's some wiggle room here, but for a conventional loan you're looking at 5, 10, or 20 percent of the purchase price. (At 20 percent, you avoid mortgage insurance, which is otherwise up to 1 percent of the home's purchase price.)

Change Your Habits

Stay on top. Create a savings schedule, and post it someplace where you'll see it daily. Open an account specifically for down payment savings and make regular deposits, however small, every payday. Keep your checkbook balanced.

Adjust withholding taxes. If you're qualified to do so, changing your salary withholdings can give you more cash for your house piggybank.

Moonlight. If working at a second job for a year or two will make the difference between living hand-to-mouth and saving a down payment, take it on. Once you've covered your down payment, you can probably lose the extra gig.

Simplify. What luxuries can you live without as you beef up your savings? Think cable, cell phone, Italian shoes, handheld computer, caller ID, and music and books hot off the presses. Hit up the library for music and literature. Sail past the mall and head for a discount mall—or try consignment shops for clothing and furniture. For essential items, wait for sales. Shop at less expensive grocery stores, compare prices per ounce, and adapt your diet: Alternate expensive meats, seafood, and store-bought sauces with produce and grains.

Cut up your cards. If you have more than one or two credit cards, consolidate. Use the cards with the lowest APR, and give the boot to your "spares." You'll be less tempted to charge, and you'll save on annual fees.

Earn interest. Certificates of Deposit (CDs) and treasury notes are secure and earn a higher interest rate than do savings accounts. Talk to a representative at your bank about your options.

Ask for help

Mom, Dad? Will your folks consider a financial gift toward your down payment? Each individual is allowed to give a gift of $10,000 per year to someone without the recipient paying gift tax. Or your parents might be willing to co-sign for a loan, in which case your lender might approve their paying your down payment. They would be jointly responsible for your monthly mortgage payments, and the title would be in their name. It's a bit tricky, so if you go this route, invest in a financial advisor and a real estate attorney. After you've built equity in the house, or when your finances improve, you may be able to refinance the loan in your own name. Alternatively, your parents could purchase a home and lease it back to you. You'd make monthly payments; they'd receive a tasty tax break.

Nonprofit assistance. If you're affiliated with a church, synagogue, or other nonprofit organization, ask about help with a down payment. Be sure to put any agreement in writing.

Find a partner. Is a friend or family member looking for a long-term investment with low responsibility and high-yield potential? They could pay the down payment if you carry the mortgage payments—or you can split all costs and divide any profits when you resell the house.

Sell, sell, sell

Real estate. If you already own property, you can sell it or borrow against it.

Vessels and vehicles. If you own a boat, RV, car, or motorcycle that you can live without, sell it and add the proceeds to your savings account.

Securities. If you own securities, you can either sell them or establish a loan through your stock brokerage to borrow against them.

Pawnshops. Talk to pawnshops about their terms. You may be able to pawn valuables for down-payment cash and buy them back when your finances are steadier.

Collectibles. As a last resort, consider selling valuable collectibles or heirlooms. Give family members the first bid on items with sentimental value.

Creative Financing

Explore low-cost loans. Contact state housing agencies and your credit union. The government also sponsors some loan programs, such as those offered by the Veterans Administration (VA) and the Federal Housing Administration (FHA), to make home buying affordable to low- and middle-income buyers. Benefits from these sources range from low down payments to reduced interest rates to paying few or no points. If you have an impeccable credit record, look into Fannie Mae or Freddie Mac loans, which offer zero-down terms to qualified borrowers.

Refinance existing loans. If you're making payments on other loans, refinance and add the savings to your down-payment kitty.

Look for assumable loans. You can save money and possibly even avoid a down payment if sellers let you assume their loan instead of buying out their equity.

Ask about lease options. Some homeowners will let you lease toward future purchase, which can benefit them financially.

Look into foreclosures. If you have a decent credit record, and the lender or government agency wants a quick sale, you may be able to buy a foreclosure with a zero down payment. Ask if value-enhancing skills such as landscaping or carpentry are acceptable in lieu of cash.

Borrow. Whether from parents, friends, or a nonprofit group, it never hurts to ask. If you have life insurance, consider cashing it in or borrowing against it. You can also borrow against your retirement funds. But keep borrowing in balance: debts are a red flag to lenders.

Barter. If you have something of value to trade—from boats to specialized services—offer it to the seller in lieu of a full or partial down payment.

Dip into your IRA. This isn't universally recommended, but first-time home buyers can remove $10,000 from an IRA without penalty. While you still pay state and federal income tax (unless you have a Roth IRA), under some conditions this is a viable option for attaining down payment goal.