How to pay a mortgage

Traditional mortgage down payments have always been 10 to 25 percent of the total purchase price of the property.

These are usually still required of people who have owned a home for five or more years and have built up enough in equity to cover most if not all of the down payment requirement on another home.

What about first-time home buyers or those with little to no equity? In today's market, it is prohibitive even for the most frugal of first-time home buyers to come up with a traditional down payment. Houses that sell for $200,000 would require a down payment of $20,000 to $40,000, but there are options.

Let's look at some of them.

VA Loans

Veterans Administration loans are designed to help service people and veterans obtain financing at very reasonable rates. They don't require a down payment or mortgage insurance. These loans are backed by the federal government. These are probably the very best loans available.

FHA

The Federal Housing Administration was created to help middle- to lower-income buyers secure home loans. The FHA doesn't actually lend the money; instead, it insures the loan. The FHA requires only a 3.5 percent down payment. There are guidelines, and the buyer'scredit is important to meeting these requirements

Fannie Mae and Freddie Mac

These federally chartered programs offer loans for 3 percent down. They either own the loan or guarantee it. A buyer must meet certain criteria.

Other Options

There are private lenders that have programs not requiring the full down payment, but these generally have much higher requirements and higher interest rates.

Willingness to Pay, Credit History and PMI

In most cases, regardless of the loan, a willingness to pay must be demonstrated by the buyer in one or more ways. For instance, if the property is going to be the buyer's primary residence, he is more likely to pay because he will be living there. Credit history and willingness to pay criteria will help the borrower to qualify for a loan with a lower down payment. Thus, it's important to have a good credit history. Your debt-to-income ratio also has to meet the loan requirement.

Most lenders require private mortgage insurance (PMI). Mortgage insurance is usually required on any loan when the property owner doesn't have at least 20 percent equity in the property. It is an insurance program that protects the lender and allows them to offer lower down payment loans. The problem is that the money spent for the insurance is not going to paying off the loan and achieving the necessary equity. However, when the 20 percent mark is reached, the insurance becomes unnecessary and ceases.

Although you may not have to put a full 20 percent down to buy a home or rental property, it is wise to put down as much as possible. A down payment shows lenders that you are serious about the purchase. It also creates equity, helps your credit score and often lowers your interest rate. As an added bonus, whatever you put down is money you won't be paying interest on. Save as much as you can toward the down payment and be sure to pay off as much debt as possible before applying.