In generations past, when your grandparents and maybe even parents planned to buy a home new, they knew that they should save a down payment equal to 20% of the home's cost. They learned to save, and they learned to buy small starter homes that they could easily afford. Nowadays, this is the exception, especially for first-time homebuyers. There are numerous mortgage options available today, some of which require a very low or even no down payment. Although these types of loan will allow you to buy a house, they do not come with the best loan rates, and they often require additional insurance costs to protect the lender if you default on the loan.

Conventional loans
Conforming conventional loans include fixed rate, adjustable rate and balloon loans of $359,650 or less (for 2005). Conventional simply means loans that are not insured by a governmental agency.

• Conventional loans are also called Conforming loans because they conform to the loan limits set by Fannie Mae and Freddie Mac, the largest mortgage buyers in the U.S.
• Conventional loans are not insured by the federal government. 
• Terms for conventional loans are typically 10, 15, 20, and 30 years.  In addition, fixed rates, adjustable rates and balloon loans are available.
• The minimum down payment for a conventional loan on a house you will occupy is 5%.  However, other conventional programs may be available with a lower down payment.
• Conventional loans with a down payment of at least 20% do not require private mortgage insurance (PMI).  PMI is insurance that protects the lender against default.  It is not required if you make at least a 20% down payment on a home purchase or have at least 20% equity in your home in case of a refinance.

Federal Housing Administration (FHA) loans
The FHA is a federal agency within the U.S. Department of Housing and Urban Development (HUD). FHA's primary objective is to assist in providing housing opportunities for low to moderate income families. The agency insures home mortgage loans made by private lenders such as credit unions and banks.

• FHA mortgages are available in term lengths from 15 to 30 years.
• FHA loans allow you to have a much lower down payment than normal (as low as 3%). However, as with all loans, the lower your down payment, the higher your monthly payments.
• The monthly mortgage payment may not exceed 29% of gross monthly income; the total monthly payments on long-term debt including the mortgage may not exceed 41%.
• FHA mortgages have lending limits that vary based on a variety of housing types and the state and county in which the property is located. The maximum mortgage amount for a single family unit is $312,895, but this varies by location. For example, in Bexar County, Texas (home to SaveMillions), the single family limit is $172,632.
• FHA insured loans require mortgage insurance to protect lenders against losses that result from defaults on home mortgages.
• The borrower is able to finance closing costs and the upfront mortgage insurance premium into the mortgage.
• The borrower will also be responsible for paying an annual premium (included in the monthly payment).

Veteran's Administration (VA) loans
The VA provides fixed-rate loans to borrowers with an option of financing their mortgage in 15, 20, 25, or 30 year terms. As with other fixed-rate loans, the interest rate remains fixed for the life of the loan.

VA loans are guaranteed by the Department of Veterans Affairs and can be used to purchase a single family home, including a townhouse or condominium unit in a VA approved project, to build a home, and to purchase and improve a home.

VA financing is designed to benefit veterans of the armed services, those currently in active duty or the reserves, and their spouses. In order to qualify for a VA loan, veterans must be eligible as defined by the Department of Veterans Affairs. This typically includes veterans and reservists with 90 days wartime or 180 days peacetime service and no dishonorable discharge, or the unmarried, surviving spouses of veterans who died due to service-related illness or injury.

To qualify for a VA loan, you total long-term debt including the mortgage payment must not exceed 45% of gross monthly income.

Veterans can qualify to put zero down on a loan up to $359,650. VA fixed-rate loans are full documentation loans. Before closing, a funding fee will be collected from the borrower (except in case of disability) and can be financed into the loan.

Other options
If your calculations indicate that you can't afford to put at least 10% down, there are some options to consider:

• Find out whether you are eligible for a loan guaranteed by the FHA or the VA, which require little or no down payment.
• Consider a no-down loan or a low-down loan. There are mortgages now that will let you put down as little as 3% or will even finance 100% of the sales price.
• Consider a piggy-back loan to avoid the cost of PMI while allowing you to put down less than a 20% downpayment
• Investigate state and local programs for low- and moderate-income families and for first-time buyers. You may be able to get a lower-rate mortgage with a small down-payment requirement. Check what's available through any lender or real estate agent, or through your state or local housing agency. Visit the National Council of State Housing Agencies website for a listing of state housing finance agencies in your region.
• The USDA's Rural Housing Service (RHS) also has a no-money-down program for moderate-income people seeking to buy in rural areas. For more information visit the RHS website to get names of prospective lenders in your area.
• Consider buying a less expensive condo or house that needs fixing up.
• Rent using a lease-option contract, which gives you the right to live in the house for a period of time and the right to buy the property for a specified price during an agreed-on period of time.
• Look for property whose seller is willing to act as the lender. You don't have to meet institutional credit standards and may be able to work out a better deal.
• Consider an equity-sharing purchase with a family member who is willing to make the down payment.
• Try to get help from family or friends. As a rule, you'll be expected to make at least a 5% cash downpayment in addition to any funds received as a gift toward the purchase.
• Use a seven- to ten-year balloon loan. This lets you make payments comparable to those for a much longer-term loan.
• Consider a penalty-free IRA withdrawal for a first home. Once in your lifetime you can withdraw up to $10,000 from your IRA penalty free, regardless of your age, to help pay for a first home for yourself or a family member (such as a spouse, child, grandchild, parent or grandparent). If you're married, you and your husband or wife can each take $10,000 from your IRAs penalty free for a first-time home purchase.
  • If you have a traditional IRA, you won't get hit with the usual 10% early-withdrawal penalty, but the money will be fully taxed in your top bracket (except to the extent that the withdrawal represents nondeductible contributions -- money on which you paid federal income taxes on before stashing it in the IRA).
  • Roth IRAs offer an even better deal for first-time home buyers: You can withdraw 100% of your contributions tax- and penalty-free at any time (for first-time home purchase or anything else). On top of that, you can take up to $10,000 of earnings penalty free. And, if your Roth has been opened for at least five years, those earnings are tax-free, too.

Once you've considered the various types of mortgages, and have a pretty good idea of what might be appropriate given the amount of your downpayment, it's time to find the right lender and mortgage for you.

Time to check your credit report