The end of the 0% down payment

Get out those magic beans

So, how do you get the extra money to make a bigger down payment? Here are the three ways I like best:

Savings. Building your down payment from your current income can be slow going, but it has a definite advantage: You learn to live below your means, a helpful skill when you're going to be a homeowner. The discipline of controlling your spending can help ensure you keep the home you finally buy, particularly if you make sure to have at least two months' worth of payments left over in savings after you cover the down payment and closing costs, which typically run 2% to 5% of the loan. These days, there's not much penalty for waiting because:

• Home prices will continue to fall. We're not done with the foreclosure crisis by a long shot. So if you wait, you might get a better deal.

• Rates aren't going to shoot up. At least not anytime soon. The Fed is clearly on a mission to drive mortgage rates down, said mortgage expert Dick Lepre of LoanMine.com. Of course, once the economy improves, all that money that's been injected into the financial system could lead to inflation and higher interest rates. But that's not going to happen for a while.

Selling assets or nonretirement investments. Selling an extra vehicle or that stock Grandma gave you years ago could plump up that down payment quickly. You're giving up the future returns you might have made on those assets -- maybe that car will be a valuable antique someday or the stock will suddenly shoot up in value -- but you may decide homeownership is worth that risk.

A gift from your folks or other relatives. If they have the cash to spare, a gift from a loved one can get you into a house more quickly. A gift is far better than a loan, by the way, since any borrowed money affects your debt-to-income ratio and could reduce the amount of mortgage for which you can qualify.

Less desirable sources of funds include:

A 401(k) loan. The loan can become an inadvertent withdrawal if you lose your job and can't pay the money back quickly. In these uncertain times, with the risk of unemployment high, that's not a chance I'd recommend you take unless you're one of the few with a rock-solid job.

A $10,000 IRA withdrawal. You can bust up to $10,000 out of a regular individual retirement account for a home purchase without paying early withdrawal penalties, but you will have to pay applicable income taxes. If you're in the 25% federal tax bracket, that could set you back up to $2,500, plus any state and local taxes -- a pretty stiff price. You can take the money tax-free out of a Roth IRA, provided you've contributed at least as much as you're withdrawing (any excess would be considered taxable gains). But remember that taking the money now can cost you later. A $10,000 withdrawal now can cost you $100,000 in lost future retirement income, assuming 8% average annual returns over 30 years (and yes, Virginia, that's a reasonable assumption considering historical returns).

In either case, you should talk to a tax pro before taking any money from a retirement account.

Also, I should make the point here that you don't want to commit every cent you have.

Having an emergency fund is important in any economy but particularly so now. Lepre urges his customers to make smaller down payments and accept private mortgage insurance, if a larger down payment would deplete their savings.

With recession and rising layoffs, he thinks homeowners should have up to 12 months' worth of payments in an emergency fund.

"You don't want to take all your reserves and throw it into a house," Lepre said. "Don't let this house become a burden where (you're worrying), 'How are we going to make the payment?'"

Meet Weston at The World Money Show

MSN Money's Liz Pulliam Weston will be among more than 100 experts sharing their advice on money and investing in 2009 at The World Money Show in Orlando, Fla., Feb. 4-7. Invest four days dedicated to planning and refining your finances by attending some of the event's more than 300 workshops and panel presentations.

Admission is free for MSN Money readers. To sign up, call 1-800-970-4355 and mention priority code No. 012866, or register online.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Dec. 15, 2008

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