My wife and I have about 35K in our IRA and we want to cash all of it for a down payment on our first home. Can we cash the entire amount and then claim that 20K was used towards down payment so that there will be a 10% penalty only on the remaining 15K?===>correct; you and your spouse may each withdraw $10K from your Traditional IRAs without penalty; The $10k per-person limit is a lifetime limit, so you can't withdraw $5k twice in two different home situations. You will need to pay federal and state taxes on the money you take from your Traditional IRA, as it will be considered income by the IRS. This may significantly lessen the total amount available to purchase a house. For example, if you are in the 15 % tax bracket, your $10K withdrawal will translate into only $8.5K.
Is it better to cash the $20K and the remaining $15K in separate withdrawals?======>>I guess no difference; as a first-time home buyer, you can take out $10K($20k FOR you and your spouse) from a Traditional IRA without the usual 10% early withdrawal penalty. However, as said, You’ll still have to pay any applicable income taxes, though.