Homeownership is also good for our communities, because families who own their homes are more involved in their communities and participate in local events.

The rewards of homeownership include:

• Personal satisfaction
• Sense of community
• Tax savings
• Stability for you and your family
• Investment in the future

Still, for many Americans, owning a home continues to remain just slightly out of reach. For more and more families, saving the money for a down payment is the biggest obstacle to homeownership. Many people mistakenly believe that you have to come up with a down payment equal to 20 percent of the price of a home.

Traditionally, lenders have required that home buyers be able to make a down payment of at least 20 percent of a home's purchase price to get a home loan or mortgage. Mortgage lenders, however, will grant home loans to qualifying home buyers with a down payment of as little as 3 to 5 percent of the purchase price if the mortgage is insured.

In fact, home loans with down payments of less than 20 percent are becoming increasingly popular. They are called "low down payment mortgages."

This is good news for the millions of home buyers who are finding it difficult to save a large down payment, especially for their first house.

What Makes a Low Down Payment Possible?

Simply put, mortgage insurance protects the mortgage lender against financial loss if a homeowner stops making mortgage payments. Lenders usually require insurance on low down payment loans for protection in case the homeowner fails to make his or her payments. When a homeowner does not make mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all the money he put into it. The mortgage insurer has to pay the lender's claim on the defaulted loan.

For this reason, it is crucial that the family buying the home can really afford it – not only when they buy it, but throughout the time period of the loan.

Although the cost of mortgage insurance is paid by the home buyer, or borrower, the mortgage insurer works directly with the lender. Mortgage insurance is available to commercial banks, mortgage bankers and savings & loans, all of which offer mortgage loans to home buyers.

Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance. This type of policy repays an outstanding mortgage balance if the person who took out the insurance policy dies.

Secondary Market

The lender's decision to use mortgage insurance is driven by the requirements of investors in the mortgage market. Because of the losses that could occur, major investors require mortgage insurance on all loans made with low down payments.

The three primary investors in home loans are the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae). By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country.

Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy the mortgages. It adds the guarantee of the full faith and credit of the U.S. government to mortgage securities issued by private lenders.

Government Insurance vs. Private Insurance

Now that we have explained how mortgage insurance works and why it is necessary, let's look at the basic kinds of mortgage insurance. Low down payment mortgages can be insured in two ways – through the government or through the private sector.

Mortgages backed by the government are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the U.S. Department of Agriculture's Rural Housing Service (USDA-RHS).

The minimum effective down payment FHA requires is less than 3 percent. For single-family homes, there is a limit on the loan amount that varies according to geographic area.

Although anyone can apply for FHA insurance, the other two government mortgage guarantee programs are much more targeted. The VA program is limited to qualified, eligible veterans and reservists. The USDA Rural Housing Service insures loans for the construction and purchase of homes in rural communities. These programs are very specialized, so contact your lender for details.

Compare The Types Of Mortgaegs

Obtaining conventional financing is the alternative to obtaining a home loan backed by the government. Conventional mortgages are all home loans not guaranteed by the government, including those guaranteed by private mortgage insurers.

Although both government and private insurance are based on the concept of allowing families to get into homes with less cash down, there are many differences between the two. Often the lender or loan originator will play an important role in suggesting and deciding which insurance is selected.

Private mortgage insurance is available on a wide variety of low down payment home loans and there is no pre-set limit on the loan amount. Although differences such as these may affect whether the lender prefers to work with government or conventional mortgages, your lender will discuss with you which one would be better for your situation.

With the wide variety of loans available, home buyers have the freedom to choose the type of loan that best suits their needs. Early on in the home buying process, it is a good idea to meet with several lenders to compare the types of mortgages they offer and shop for the best price and terms. Best of all, working with a mortgage insurer can be very easy – whether your loan is insured by the FHA or a private mortgage insurer – because your lender handles all of the arrangements.

By making lending money to home buyers safer, mortgage insurance helps more families get into homes of their own.

Qualifying for a low down payment loan is much like applying for a regular loan.

To be considered for a low down payment loan, you generally need to have:

• Sufficient income to support the monthly mortgage payment.
• Enough cash to cover the down payment.
• Sufficient cash to cover normal closing costs and related expenses (explained below).
• A good credit background that indicates your payment history or "willingness to pay."
• Sufficient appraisal value, which shows the house is at least equal to the purchase price.
• In some instances, a cash reserve equal to two monthly mortgage payments.

Closing costs, or settlement costs, are paid when the home buyer and seller meet to exchange the necessary papers for the house to be legally transferred. On average, closing costs run 2 to 3 percent of the house price. This percentage may vary, depending on where you live.

Closing costs include the loan origination fee (if not already paid), points, prepaid homeowner's insurance, appraisal fee, lawyer's fee, recording fee, title search and insurance, tax adjustments, agent commissions, mortgage insurance (if you are putting less than 20 percent down) and other expenses. Your lender will give you a more exact estimate of your closing costs. You can eliminate the need to pay a year's mortgage insurance premium at closing by choosing a monthly premium program.

Points are finance charges that are calculated by the lender at closing. Each point equals 1 percent of the loan amount. For example, two points on a $100,000 loan equal $2,000. Lenders may charge one, two or three points in up-front costs in addition to the down payment. The more points you pay, the lower your interest rate will be. In some cases, you may be able to finance the points.

In attempting to approve home buyers for the type and amount of mortgage they want, lenders basically look at two key factors: the borrower's ability and willingness to repay the loan. Ability to repay the mortgage is verified by your current employment and total income. Generally speaking, lenders prefer for you to have been employed at the same place for at least two years, or at least to have been in the same line of work for a few years.

The borrower's willingness to repay is determined by examining how the property will be used. For instance, will you be living there or just renting it out? Willingness also is closely related to how you have fulfilled previous financial commitments, thus the emphasis on the credit report or rent and utility bills.

It is important to remember that there are no rules carved in stone. Each applicant is handled on a case-by-case basis. So even if you come up a little short in one area, perhaps one of your stronger points will make up for the weak one. Everyone involved in real estate is in the business of selling homes, in one way or another. Therefore, if the loan makes sense, lenders and insurers will do their best to see that you qualify.

By its very nature, mortgage insurance is an aid to affordability, because it allows families to buy homes with less cash on hand. The industry plays a central role in helping low- and moderate-income families become homeowners.

More and more borrowers are taking advantage of low down payment mortgages and becoming homeowners with less than 3 percent down. For more information on how you can take advantage of the benefits of a low down payment home loan with mortgage insurance, contact your local lender or real estate agent. For general information on purchasing a home, contact the county extension office of the U.S. Department of Agriculture, listed in the government pages of your telephone book.

There are two basic formulas commonly used by lenders to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.

It is important to remember that the following ratios may vary from lender to lender and each application is handled on an individual basis, so the guidelines are just that - guidelines. There are many affordable housing programs, both government and conventional, that have more lenient requirements for low- and moderate-income families. Many of these programs involve financial counseling to help potential home buyers learn about the financial responsibilities of owning a home.

Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26 to 28 percent of your gross monthly income. For FHA loans, the ratio is 29 percent of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance – often abbreviated PITI. For example, if your annual income is $30,000, your gross monthly income is $2,500, and $2,500 x 28 percent = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.

Any expenses that extend 11 or more months into the future, such as a car loan, are termed long-term debt. Total monthly costs, including PITI and all other long-term debt, should equal no more than 33 to 36 percent of your gross monthly income for conventional loans. Using the same example, $2,500 x 36 percent = $900. So the total of your monthly housing expenses plus any long-term debts each month cannot exceed $900. For FHA loans, the ratio is 41 percent.

Maximum allowable monthly housing expense:

26-28 percent of gross monthly income – conventional

29 percent of gross monthly income – FHA

Maximum allowable monthly housing expense and long-term debt:

33-36 percent of gross monthly income - conventional

41 percent of gross monthly income – FHA

One way to determine how much to spend for housing is to compare your monthly income with monthly long-term obligations and expenses. Use the worksheet, "Evaluating Financial Resources," to determine how much money you can spend on housing. Be sure to include only income you can definitely count on.

When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and insurance costs. If you are purchasing an existing home, gather information such as utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for homeownership.

Homeowner's insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. To protect the full value of your investment, however, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance provides only a fixed dollar amount, which may be insufficient to rebuild a badly damaged house.

There are a few restrictions on the type of home you may buy with a low down payment loan. In addition, low down payment loans may be used with a wide variety of mortgages.

Besides price range, there are many other factors to consider when purchasing a home. It's in your best interest to take care in selecting a home that will have lasting value as well as provide shelter. Be sure the neighborhood and house meet the needs of your family. If you have children, you may want to know if there are other children in the neighborhood and what schools or playgrounds are nearby. Also consider the availability of public transportation and how far family members will have to commute to work or school.

Check the condition of the plumbing, heating and electrical systems and whether they are up to regulatory codes. The best and easiest way to do this is through a home inspection from a certified inspector.

If you are like most people, a home is the single largest purchase you will ever make. It is important that you select a home that will meet your family's needs and keep you happy for years to come. And most important, you must be able to afford to remain in that home for as long as you please.

Remember: Shop, Compare, Negotiate

When buying a home, remember to shop around, to compare costs and terms, and to negotiate for the best deal. Your local newspaper and the Internet are good places to start shopping for a loan. You can usually find information both on interest rates and on points for several lenders. Since rates and points can change daily, you'll want to check your newspaper often when shopping for a home loan. But the newspaper does not list the fees, so be sure to ask the lenders about them.

The Mortgage Shopping Worksheet that follows may also help you. Take it with you when you speak to each lender or broker and write down the information you obtain. Don't be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best deal.

Obtain the Best Deal That You Can

Once you know what each lender has to offer, negotiate for the best deal that you can. On any given day, lenders and brokers may offer different prices for the same loan terms to different consumers, even if those consumers have the same loan qualifications. The most likely reason for this difference in price is that loan officers and brokers are often allowed to keep some or all of this difference as extra compensation. Generally, the difference between the lowest available price for a loan product and any higher price that the borrower agrees to pay is an overage. When overages occur, they are built into the prices quoted to consumers. They can occur in both fixed and variable-rate loans and can be in the form of points, fees, or the interest rate. Whether quoted to you by a loan officer or a broker, the price of any loan may contain overages.

Have the lender or broker write down all the costs associated with the loan. Then ask if the lender or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points. You'll want to make sure that the lender or broker is not agreeing to lower one fee while raising another or to lower the rate while raising points. There's no harm in asking lenders or brokers if they can give better terms than the original ones they quoted or than those you have found elsewhere.

Once you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in from the lender or broker. The lock-in should include the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases while your loan is being processed; if rates fall, however, you could end up with a less favorable rate. Should that happen, try to negotiate a compromise with the lender or broker.