Before arranging for a loan for the down payment, check with your lender or loan broker to be sure that your plan will be approved. Most will require that the loan be pegged at "market" interest for a minimum of five years.

Sharing Equity

One way to enlist the help of family or friends, or even an investor, is to give up a share of the ownership of your house in exchange for a cash contribution. Assuming that this person doesn't actually share your house, however, such arrangements can give rise to conflicts. With one of you viewing the house as a home and the other viewing it as an investment, issues such as the need for remodeling, or the other person's desire to sell the house, may be hard to resolve.

Substituting a Second Mortgage for a Down Payment

A principal function of a down payment is to bridge the gap between what you can borrow and the purchase price of the house. If a lender will lend $350,000 on a $400,000 house, you can make up the balance with a down payment of $50,000. There are other ways as well. One is to get an institutional lender or in rare cases, the seller or a private investor to take a second mortgage for some or all of the $50,000.

In addition to reducing the down payment, a second mortgage may allow you to avoid buying private mortgage insurance (PMI), which most lenders require if your down payment is less than 20%.

The down sides of second mortgages include that:

• Their interest rates are often higher than first mortgage interest rates.
• You must have a relatively high income to afford two mortgage payments.
• A short-term second mortgage with low payments may have a lump sum (balloon payment) at the end. If the house is fairly priced, house prices increase, and interest rates don't go through the roof, you shouldn't have trouble refinancing the first mortgage to pay the balloon payment. But if refinancing proves impossible, you'll need another way to raise the cash (or face foreclosure), unless your second mortgage lets you either gradually increase payments or delay the payment date if you can't refinance when it first comes due.