First-Time Home Buyers

Attention aspiring homeowners: Don’t be scared off by rumors that you need a stratospheric down payment and the squeakiest of credit histories to get into a house.

A 10% down payment is now the norm, says Jim McMillan, a senior loan officer for JP Morgan, but you can find 5%-down-payment loans.

Zero-down-payment options are nigh extinct, but if you’re working with a conforming loan of $417,000 or less and a credit score of at least 700, you might find one. You’ll pay private mortgage insurance (usually about $50 to $100 per month) on loans for more than 80% of the purchase price.

Lenders have become sticklers about ensuring that borrowers don’t overextend themselves, so expect to provide stricter proof of income. Borrowers who get adjustable-rate loans will need to qualify for the fully indexed rate.

The Federal Housing Administration’s mortgage-insurance program gives buyers with spotty credit a better shot at approval. In December, Congress was still kicking around legislation that would loosen rules on down payments and extend the FHA’s reach to more condo buyers.

State and local government resources offer down-payment assistance, and getting help generally doesn’t affect your eligibility for favorable mortgage terms. Check HUD Local Homebuying Programs for resources in your area.

Lenders look at three things when you apply for a mortgage: credit score, debt-to-income ratio and down payment. “If you’ve got two of the three elements working for you, you’re in good shape to buy,” says Jim McMillan, a senior loan officer with JP Mortgage/JPMorgan Chase.

All lenders are credit-score driven these days. FICO scores, the most commonly used, range from 300 to 850. The higher your score, the more flexible lenders will be. With a score of 700 or higher, syas McMillan, you’ll be considered an A borrower and qualify for the best rates.

Another consideration is your debt-to-income ratio. Traditionally, lenders have followed the 28/36 rule: No more than 28% of your monthly gross income should be dedicated to your mortgage payment, property taxes and insurance, with total debt payments equaling no more than 36% of your gross income.

This means if you make $40,000 a year, your payment for your mortgage, property taxes and insurance should be no more than $933 a month. Payments on total debt should be no more than $1,200 a month.

But if you have no other debt, you can dedicate 36% of your income — $1,200 in our example — to housing payments. With an FHA-backed loan, you may be permitted to apply up to 41% of your income to total debt.

The more money you put down, the less risk the lender takes on – and the more likely you are to snag the loan. A 20% down payment is the threshold at which you’re exempt from private mortgage insurance, which can add a few hundred dollars to your monthly payment. PMI is totally tax-deductible for 2007 if your adjusted gross income is less than $100,000, and Congress is expected to extend the tax break into 2008. Contracts written before 2007 are ineligible for the deduction.