Can I get a mortgage with a low down payment?

Q: I've heard that it's possible to buy a house with less than the standard 20 percent down payment. Is this true?

A: Some lenders offer mortgages with down payments significantly lower than 20 percent. Market conditions, your credit rating and other important factors determine your eligibility for a reduced down payment.

Buying a home traditionally meant making a 20 percent down payment. However, some lenders now offer mortgages that only require a buyer to put down 10 percent, 5 percent or sometimes even less. During a red-hot real estate market, getting approval for these loans is often easier, because both lenders and home buyers can rely on the safety net provided by rising house prices. But now that the market has cooled in many areas and interest rates may begin to inch up, lenders have become more cautious, and low-down-payment mortgages may be harder to obtain.

“We continue to see lenders tightening the guidelines for high 100%-plus-market-value loan-to-value loans and second mortgages, with some lenders completely eliminating these offerings in recent months,” says Pamela Hamrick, vice-president of operations for LendingTree Loans. “However, it’s still very possible to get a mortgage with a low down payment, particularly if you have done a good job of managing your credit.”

If you have excellent credit and you’re approved for a mortgage with a down payment of less than 20 percent, you will usually have to make some special arrangements. If your mortgage amount is 80 percent or more of the home’s value, you’ll generally be required to buy private mortgage insurance (PMI). This usually costs about 0.5 percent of the loan amount annually, and the premium may be added to your monthly payment.

The good news is that some homeowners may now be entitled to a tax credit that can significantly lower the cost of PMI. Borrowers with adjusted gross incomes of up to $100,000 can now qualify for a 100 percent tax deduction on their 2007 PMI premiums, while those with incomes up to $109,000 can qualify for a partial deduction (the allowance decreases by 10 percent per $1,000 of adjusted gross income over $100,000). The tax credit is effective for mortgage insurance certificates issued between January 1 and December 31, 2007, with Congress holding the option to renew the legislation for future years. Talk to your tax advisor to confirm the deduction in your case.

One way to get around paying PMI is to get a “piggyback loan,” which is a type of second mortgage. Typically, the buyer makes a 5 percent or 10 percent down payment, obtains a mortgage for 80 percent of the home’s value, and then takes out a second loan for the remainder. Piggyback loans may be less expensive than PMI premiums; talk to a financial planner to determine which is right for you.

Finally, several government programs offer assistance for home buyers who cannot afford a 20% down payment. The Federal Housing Administration (FHA) insures mortgages for first-time buyers with down payments of as little as 3 percent. Fannie Mae also has similar programs for low-income families and those with imperfect credit. If you’re a veteran, VA home loans can allow you to purchase a house with no down payment at all if you have full entitlement.