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Dr. Don Taylor, CFA, advice columnistBuying a home with no down payment

Dear Dr. Don,
If I have very little money for a down payment for a new home, is there anything I can do to still purchase a home. I am almost debt free and my credit is very good. My salary is not real high, so it would take me several more years to save a down payment. Are there loans that don't require a down payment, or are there other alternatives available to someone like me? Thanks.
-- Noreen Nescient

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Dear Noreen,
Your local housing authority can tell you if you qualify for a first-time home buyers program. The Department of Housing and Urban Development's (HUD) Web site can point you to the agency in your area that offers these programs, or try the National Council of State Housing Agencies (NCSHA) directory.

HUD also oversees the Federal Housing Administration (FHA) program. FHA loans require a minimum down payment of 3 percent of the purchase price. A HUD guide, "Let FHA loans help you," explains FHA loans in greater detail.

Using conventional mortgage financing, you could attempt to qualify for a piggyback loan where you borrow 80 percent of the home's purchase price with a first mortgage and borrow the balance with a second mortgage. The piggyback approach avoids the first mortgage lender requiring private mortgage insurance (PMI), but the trade-off is that the second mortgage is going to have a substantially higher interest rate -- especially if you aren't putting any money down. It's more common to see a piggyback mortgage as an 80-10-10 mortgage where the home buyer is making a down payment, but no-equity piggyback mortgages do exist.

Bankrate's home affordability calculator can help you determine how much house you can afford with your income and current financial obligations.

In recent years the annual appreciation in home prices widely outpaced the potential returns on savings, so taking a few years to save up the down payment on a house became an uphill battle. It's possible that the real estate market in your area will cool off enough that the interest earnings on your savings can outpace the annual appreciation in home prices. Still, the expectation is for mortgage interest rates to continue to head higher. If you can afford the payments, including home maintenance, and you can find a loan program you're comfortable with, you don't have to have a down payment to buy a home.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "Money."'s corrections policy -- Posted: April 6, 2006
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