First time buyers can use their IRA as a source of downpayment money

After years of loose lending standards, which has led to the default of many homeowners, first time buyers are now required to have a minimum of a 3% downpayment. FHA loans currently require a 3% downpayment, but this is going to increase to 3.5% January 1, 2009. Most conventional loans, for borrowers with credit scores above 700, require a downpayment of 5%, if below the $417,000. Most conventional loans above $417,000 require a downpayment of 10%.

There are several ways to fund your downpayment, as a first time buyer. You can receive a gift from a family member, save it up yourself, apply for county bond money or use something you may not have previously considered: your IRA or other eligible retirement accounts.

In order to use money from your IRA to fund the downpayment, you may want to do a bit of research on your particular IRA account to ensure you can use it towards the purchase of real estate. If your IRA allows you to tap into it for your first home, each spouse is able to withdraw $10,000 for a downpayment TAX-FREE. This money can be used for the downpayment, but it can also be used refurbish your new home for up to 120 days of withdrawing the money.

For younger families that were not expecting to have to come up with a hefty downpayment, this could be the difference in getting into a new home or continuing to rent. Many lenders and financial planners have opinions about investing your IRA in real estate. We suggest getting financial and tax advice before proceeding with a withdrawal.

Withdrawing cash from an IRA before you turn 59 1/2 almost always carries hefty penalties, but the IRS makes an exception for first-time home buyers. There is no penalty as long as you put the money toward building, buying or refurbishing your first home within 120 days of receiving the money.

If your spouse also qualifies as a first-time buyer, you can get up to $20,000 to invest in your dream home. That is the equivalent of a 5% downpayment on a $400,000 house.

A first-time home buyer is anyone who hasn’t held an ownership interest in a main home for the last two years, according to IRS Publication 590.