By BankingMyWay.com Staff
Once upon a time, homeowners could get a mortgage for no money down. Today, zero down mortgages are just a fairy tale. At the peak of the housing boom, home prices were rising so quickly that the lending industry was confident of repayment because appreciation equity would offset the lack of down payment equity.

Housing prices have declined dramatically since then and have not yet appeared to hit a bottom. To compensate, it's much harder to get a mortgage without at least a 10% down payment. Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE), the government-sponsored enterprise that buys mortgages from lenders, have now capped the loan-to-value ratio for conforming mortgages at 90%. That means if a lender wants to be able to sell the mortgage to Fannie or Freddie, it must comply with that cap. The current instability in the housing market means far fewer lenders are willing to risk loans on non-conforming mortgages.

If you can come up with 10% for a down payment, you may be in good shape. Many lenders are competing for well-qualified borrowers. However, the standards for who is considered “well-qualified,” have also tightened. Today, lenders are looking for significantly higher credit scores to qualify buyers for the best rates. In the past, a 700 or even 680 credit score could get you the best rates. Right now, you’ll need a likely 740 or above to take advantage of the record low mortgage rates.

Paying less than a 20% down payment, however, still comes with the added burden of private mortgage insurance (PMI). Private mortgage insurance protects the lender from losses if you default on your loan. With a low down payment, borrower default is both more likely and more costly for the lender. Annual PMI premiums are generally around 0.5 percent of the loan amount paid in monthly installments. For example, on a $150,000 loan, the annual premium would be $150,000 x .005 = $750. Consequently, $62.50 would be added to your monthly payment.

If you don’t have 10% saved, but still want to take advantage of the record low mortgage rates and finally affordable home prices (as well as the First Time Homebuyer Tax Credit), you do have other options. FHA loans are now more popular than ever because they only have a 3.5% down payment requirement. Additionally, FHA loans have less-strict credit requirements.

Getting an FHA loan does have some drawbacks, however. First, you’ll also have to pay mortgage insurance. FHA mortgage insurance works like PMI and includes a relatively comparable monthly premium payment. On top of that, though, you’ll also have to pay an upfront mortgage premium at closing totally 1.75% of the loan amount. On a $150,000 loan that equals $2,625. The upfront premium is usually rolled into the loan.

Another problem with FHA mortgages is their loan limit. You can only borrow up to the maximum allowed amount in your area. These amounts vary depending on where you live but range from $271,050 to $729,740. The limit is calculated as 125% of the area median house price.

Remember, while you may save in upfront costs with an FHA loan, you’ll start off underwater on your home since it typically costs 6% in broker commission to sell in the first place. And if home prices continue to fall, you’ll be in even worse shape.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.