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Alternative Sources of Down Payment Money Are Better than Low-Down Loans.

Another way to get into a house with little money down is by letting someone else give you the money to do so. That's not a bad deal if you can swing it, right? Down payment money can come in the form of a gift, a grant, or a forgivable loan.

The FHA allows a family member, a nonprofit organization, or your trade union to give you the money you need to buy a home. Usually this is about 3.5 percent of the sales price and an additional amount for closing costs.

There are other allowances for down payment assistance that can be designed by local, county, or state governments for teachers, veterans, firefighters, cops, and other public servants.

Lenders don't have a problem with such loan programs, as long as the loan program is specifically designed to accept such gifts and grants and follows the various rules and requirements that guide them. Your buddy at work can't give you a gift to buy a home using an FHA loan. Neither can the women in the book club. These gifts must come from approved sources.

Your gift can't look like it's a loan. A loan would mean that you'd have to pay it back, which would affect your debt ratios, and it's possible that the gift giver would want some kind of interest in the property.

It's Okay If You Make a Small Down Payment—but It Can Affect Your Monthly Payments.

If you have little money to make a down payment on a home, that's okay. Really it is. For some reason, consumers think that big down payments are a requirement or that if you don't have a big down payment, then your home loan is coming from a band of loan sharks.

Back in 1934, the Federal Housing Agency was created to help foster home ownership. The country had just suffered through the Great Depression, and what better way to get the country going again than to put as many people as possible into their very own homes?

One of the biggest obstacles to buying a home was having enough money for a down payment. In those days, mortgages were indeed made from other people's deposits, and banks could establish any lending policy they saw fit.

To protect their depositors' assets, the banks would require a hefty down payment, sometimes as much as 50 percent! But with the FHA, lenders could make a mortgage loan with as little as 3 percent down, and if the loan ever went bad, the lender could get its money back from this government program as long as the loan was made in accordance with FHA lending rules.

In 1957, an insurance company came up with another idea. Instead of requiring that home buyers put up a minimum of 20 percent down to buy a home, the insurance company came up with a policy that said, "Okay, if your borrower defaults on the loan, we'll make up the difference in the down payment"—in other words, mortgage insurance.

This is not to be confused with an insurance policy that pays off a home loan in the event of the borrower's death. It's a policy that pays the lender the difference between 20 percent down and what the buyer actually put down.

The borrower puts less than 20 percent down, say 10 or 5 percent, and the borrower buys an insurance policy that covers the difference between the 80 percent level and the actual down payment.

 
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