In Pursuit Of a Down Payment

If you need a jumbo mortgage, which is above $417,000 and cannot be bought by Fannie or Freddie, you'll probably have to come up with 10 percent of the purchase price in cash, Cecala said. On a $500,000 house, that would be $50,000. Loans purchased by Fannie and Freddie are considered less risky to investors and at the moment have better rates than jumbo loans.

The sudden shift in lenders' attitudes means many buyers now must take a substantial amount of money to the closing table, particularly in high-cost areas such as the Washington region.

The best source for a down payment, lenders and financial planners said, is the borrower's own funds. "If you've got the cash, that's the best way to do it," said Heather Evans, vice president and wealth management adviser at Merrill Lynch in Tysons Corner.

Tapping the 401(k)

But if you're like most Americans and haven't saved tons of money over the years, does that mean you won't be able to buy a home?

Not necessarily, lenders and financial planners say. There are several options.

Prospective homeowners can take money out of their 401(k) or other retirement plans if the home will be their primary residence. There are two ways to do this. The less desirable way, financial planners said, is to make a "hardship withdrawal," but that is subject to a 10 percent penalty from the IRS, and the amount withdrawn is taxable as income.

A better -- but not risk-free -- option, they said, is to borrow the money from a 401(k) account, which many employers allow for such reasons as purchasing a principal residence or paying college tuition. Typically, borrowers have five years to pay the account back, or longer if the loan is specifically for a home purchase. Borrowers have to pay interest on the loan. But they are essentially borrowing their own money, and what they pay will go back into their 401(k) account.

The downside is that the funds withdrawn are not earning returns on investment, so the borrower will have less money in the account when he or she retires. Plus, the loan repayments are made with after-tax dollars, replacing what had been pretax dollars. And if the borrower loses his or her job or switches to a new employer, he or she must repay the loan much sooner than expected, usually within 60 days.

Patrick Kennedy, vice president in charge of wealth management services for TIAA-CREF Asset Management, cautions against taking money from a retirement plan by either method because of the tax implications and the loss of wealth. But if someone chooses to do so, he said, the loan should be repaid as quickly as possible. "The government has made it easy, and it's very appealing, but you have got to look at this as a short-term bridge, not a long-term road," he said. "People have to think through the implications of what they're doing."

Kimberly Lee, an auditor for Constellation Energy Group in Baltimore, chose to dip into her 401(k). At 28, she felt it was time to become a homeowner, and she found a rowhouse in Baltimore for $249,000. She had been saving money since graduating from college but didn't want "to completely drain my savings," she said.

She put about $8,000 of her savings into the down payment. To make a 5 percent down payment, she pulled the rest from her 401(k) account. The loan repayment comes directly out of her paycheck.

Because she has a steady job, she thought it was a safe thing to do. "What comes out is $15 or $20 biweekly. That's like nothing to me," she said.