NEW YORK (CNN/Money) – People once considered home ownership a stable, if not stellar, investment. But these days, real estate is enjoying its 15 minutes of fame.
Home values are surging in today's rock-bottom mortgage rate environment, and investors hungry for a piece of the action have made bidding wars par for the course.
For first-time homebuyers, that's the problem. Pricey homes require a pricey down payment, preventing many from realizing the American dream. Traditionally, the bank requires lenders to cough up 20 percent of the home's purchase price as a down payment. On a $250,000 home, that's $50,000. And that doesn't include closing costs, which can easily approach $15,000.
The solution? Buck tradition and land a mortgage with little to no money down. According to Frank Nothaft, chief economist at Freddie Mac, such loans are readily available to those with a solid credit history.
Put your money down
The average first-time homebuyer today secures a mortgage with 10 percent down. Some put as little as 3 percent down. And those with access to federal loans can sometimes buy a home for zero dollars down.
"Loans with 5 and 10 percent down are widely available at some of the largest lenders," said Fritz Elmendorf, chief economist at the Consumer Bankers Association. "Sometimes, it's just a matter of picking up the phone or using the Internet to explore what some of those products are."
Keep in mind that if you do put down less than 20 percent, you're required to pay private mortgage insurance (PMI), which typically adds roughly $100 to your monthly bills, according to Elmendorf.
Another option is to take out two mortgages, with the second one providing the amount needed to hit that 20 percent threshold. For example, if you have $20,000 for a downpayment on a $200,000 home, or 10 percent, you still need the remaining $20,000 to avoid paying PMI. Assuming you qualify, you can take out an 80-10-10 loan, where you borrow 80 percent of the home's purchase price, put 10 percent down on your own, and take out another loan for the remaining 10 percent which can be used as part of the downpayment.
Monthly payments on the second loan may cost more than PMI, but since interest on a home equity loan is tax-deductible -- and PMI is not -- you may end up saving money after taxes. Crunch the numbers to determine whether two mortgages or PMI gives you a better deal.
Finally, make sure you're choosing the type of loan that's best suited for you: 30-year fixed rates on the best mortgages, or prime mortgages, now hover near 35-year historic lows. If you plan to stay in the house for awhile -- or at least more than five years -- you should lock in those low rates.
On the other hand, if you plan to use the house as a "starter" home and trade up in fewer than five years, a better option might be an ARM, or adjustable rate mortgage, which locks in an extra-low rate for the loan's initial term and fluctuates thereafter.
A credit check-up
When deciding whether to issue you a loan and what rates to offer you, most lenders first consider your FICO score, calculated by Fair Isaac & Co. It calculates how much you owe and to whom, your payment history, and the length of time you've had credit, according to Jeanne Kelly, owner of The Kelly Group, an advisory group which helps clients improve their credit.
"To obtain approval for a loan with little down, you typically need a very good credit score -- that's a compensating factor that qualifies you for a low down-payment loan," Nothaft said.
Your credit score reflects your long-term payment history, but there are short-term strategies to raise your FICO score (or at least keep it steady) before you apply for a loan, Kelly said.
First, reduce (or eliminate) balances on any revolving debt, including credit cards, home equity loans, and anything bought on store credit.
Revolving debt accounts for 30 percent of your FICO score. Ideally, your debt should total no more than 25 percent of your credit limit. A solid debt-to-credit ratio will improve your credit score by as much as 100 points, Kelly said.
Second, don't take out any new credit for four months before you apply for a mortgage. Even something small, like a gasoline charge card application, can bring down your score.
For more information on improving your credit score, click here.
Lenders also will consider your employment history; a steady paycheck from the same employer for several years helps put you in good stead, Elmendorf added.
What's out there
Ready to tackle the real estate market? Here's a sampler of low down-payment loans.
The Federal Housing Authority offers mortgage loans with a 3 percent down payment. FHA loans have more flexible homebuyer credit ratings than those set by many private lenders and the agency permits buyers to use gifts from family to make their entire down payment.
In areas where housing costs are relatively low, the most you can borrow on an FHA loan is $144,336; in areas where housing costs are relatively high, the loan limit is $261,609. For information on FHA mortgage limits in specific areas, click here.
Private lenders, like Wells Fargo, also offer Freddie Mac's Affordable Gold loans, which require a 3 to 5 percent down payment. To qualify, your income must be at or below the median income in your area, but exceptions are made for expensive areas, like San Francisco or Boston.
And Washington Mutual recently unveiled its Community Access Loans program, which requires no minimum FICO score. Through the program, loans are granted for 3 to 5 percent down, and 1 to 3 percent can come from a family gift or grant (most programs require a down payment that comes only from your own savings).
To qualify, you must make 100 to 115 percent or less of the median income in your area, though exceptions are made.
"This program will put more people in their own homes than ever before," said Mike Axelrood, first vice president of retail lending at Washington Mutual.
And according to Nothaft, some states, like California and Massachusetts, will make no or low down-payment loans to state employees like teachers or firefighters, enabling them to become homeowners in the communities they serve.
Finally, the Veterans Administration makes 0 percent down-payment loans available to former servicemen and women who fit certain guidelines. For more information, click here.
If you have weak credit
If your credit isn't optimal and you can't qualify for prime rates, don't give up. You still have some options.
The Affordable Merit Rate Mortgage (AMRM) by Freddie Mac, for example, may meet your needs.
Mortgage rates on such loans are typically 1.25 percent higher than those of prime mortgages. Even so, it's still cheaper than a subprime loan, said Freddie Mac spokesman Doug Robinson. Here's some more good news: if you make 24 on-time consecutive monthly payments, your lender will reduce your rates by 1 point.
If you can't qualify for an AMRM or similar loan, it may behoove you to spend the next 12 months or so getting your credit into better shape, so that you can reapply next year. Today's low rate environment may have changed by then, but it may still be better than the rates bruised credit would get you today.