Down Payment Options

You might have a few other options, too. If you’re enrolled in a 401(k) or similar type of retirement plan at work, and you’ve already managed to sock away a nest egg that way, you’ve got options. Some companies’ 401(k), 403(b), and similar plans let employees take a loan against their account balance.

Unlike a withdrawal, on which you would have to pay taxes and a 10% federal tax penalty, you pay back the loan. The problem is that if you leave your job, the loan must be repaid in full right away. Otherwise the IRS will consider it an early withdrawal, and taxes and a potential penalty will be due.

You can also withdraw up to $10,000 from your IRA to put a down payment on your first home. You will owe taxes on the earnings and any contributions you deducted on your tax return, but no early withdrawal penalty. Taking money out of retirement plans, though, may not be the best choice because it may mean you have less than you need in the future.

Finally, you might phone home — that is, borrow your down payment from your parents or other close relatives. You’d hardly be the first person to do it. But it’s not that simple. Many mortgage lenders frown on borrowed down payments because it increases the debt you must repay. A lender might charge you higher interest rate on the mortgage loan you take if you borrowed your down payment.