Where Not to Go for That Down Payment
As stated above, it is possible to find outside resources for down payments that are looked on favorably by lenders. But it is possible to make mistakes in this process. The following sections describe some potential trouble areas.
Remember the emergency fund mentioned on page 22? If you have one, keep in mind why it's there. Is a home down payment really an emergency? It really isn't.
Some people actually might consider taking out a one-time loan from their IRA or their 401(k), which can be a very unsavory idea. The temptation to use 401(k) money is that as of 2007, 401(k) participants were allowed to withdraw up to 50 percent of their total balance or $50,000, whichever is higher, to use as a down payment. But as with all great deals, there are usually strings attached. You'll have to repay the loan with interest over five years, and those dollars won't be appreciating for your retirement, which may be the bigger loss. Even worse, if you quit or lose your job, you'll be presented with a bill to pay back the 401(k) money within ninety days, which is a particularly rude awakening if there's no money coming in the door.
If you're trying to extinguish debt before you apply for a loan, focus on credit card and other revolving debt first. These borrowings are generally known as unsecured debt, and as such, they carry the highest rates. Lenders like to see faithful payment records, but they don't like stubborn balances.
The downsides of taking on a mortgage without making any down payment have already been discussed earlier in this chapter. In short, these loans expose borrowers to incredible risk as rates rise and housing values slow. Another bad idea if you can avoid it.
A credit card loan is not down-payment money. Your mother's coin collection is not a source of down payment money because, surprise — it's not yours.
