For those who didn't want to put much down for a home, or had trouble saving up enough for down payment money there have always been two general options: A government-backed loan -- such as FHA or VA financing -- or a conventional loan with private mortgage insurance (PMI).

But did you know that there are conventional loans with as little as 3 percent down? Nothing down? Even nothing down plus rolling in your closing costs? Groovy, huh?

The Department of Veterans Affairs rewards its veterans, active military and certain reservists with mortgage loan programs with no money down at competitive interest rates. If you're not VA eligible, then a Federal Housing Administration (FHA) loan might be right for you for a little as 3 percent down. But if your loan amount is greater than the FHA loan limits for your community and you don't qualify for a VA loan, then you could consider a conventional loan with little or no money down.

A conventional Freddie Mac loan is available with zero money down. Some loan programs also let you roll closing costs into your loan amount with no money down, so not only can you buy the home you can also finance your closing costs, up to three percent of the sales price and sometimes more.

If your home costs $100,000, then you can buy that home with nothing down and finance various closing fees such as appraisal, title, processing and other fees into your loan up to $103,000. At a 7% interest rate for a 30-year fixed loan, your principal and interest payment would be about $680. Add $80 worth of PMI (because you didn't put 20 percent down) and your payment rises to $760. Yes, your payment went up -- but you didn't have to put anything down, certainly not $20,000 in this example. And because you financed your closing costs you really saved cash expenses.

That's the groovy part. Is there a not-so-groovy part?

When you buy a house with no money down instead of saving for your down payment and closing costs, you're automatically "upside down". The amount you financed is higher than the price of the home itself. Using that same $100,000 house and putting 3 percent down and not rolling anything into the new loan, your principal and interest payment with PMI is around $720. While a lower monthly payment is a benefit when making a down payment and not rolling in closing costs, you're also building equity a whole lot faster.

When comparing both loan types after five years, the no down payment loan balance is just $98,338 versus a balance of $91,307 with 3 percent down. Assuming no appreciation, if you sold that home before five years with a no down payment loan, you'd still owe almost the entire purchase price. But with a little down payment you would have more than $8,000 in equity over that same period of time.

While coming to a closing table with no money certainly has an appeal, it also means it will take longer to gain equity in the property. That may not be a problem for a long-term owner or in communities that are enjoying an appreciation spurt, but if you need to quickly move because of a job change or for other reasons and home values have not risen greatly, buying with no money down may mean you can't sell without bringing a check to closing.

For more articles by David Reed, please press here.

Published: January 18, 2002

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