As Fannie Mae and Freddie Mac must continue to increase homeownership, buy more loans and overall have a big, fat, happy life, they need to find other people to make loans to, right? If the current homeownership rate is hovering near, give or take, 68 percent, then what about the other 32 percent who don't yet have homes? Well, maybe they don't have enough money for a downpayment while at the same time their credit is not so good. For these folks, it might not be their best choice to grab a conventional loan. It might be better to go sub-prime.

Few may know it but some of the better interest rates available through "alternative" or "sub-prime" lenders can be just as competitive as those found in the conventional environment. Both loan officers and borrowers sometimes hear the word "sub-prime" and immediately conjure up pictures of fire-breathing dragons and interest rates in the high twenties. Not so. In fact, a little homework can show that often a sub-prime loan needs to be considered shoulder-to-shoulder. I'll give you a couple of examples.

The first is a couple with good credit and scores above 720. A conventional loan is an automatic, right? Maybe not. A conventional rate quote on a 30-year fixed-rate mortgage with zero money down can be found for around 5.75 percent by most lenders who offer such a product. That's not the best interest rate available, but it's competitive for 100 percent financing. On a $200,000 mortgage loan at 5.75 percent interest the principal and interest payment is $1,167. At the same time an alternate lender might offer a zero-money-down loan at a higher rate, say seven percent. That makes the principal and interest payment $1,330 -- $163 higher than a conventional quote. But hold your horses. Conventional loans still require a mortgage insurance payment for all loans with less than 20 percent in equity. And for zero-money-down loans, that premium is much higher than for loans with 5 or 10 percent down.

A mortgage insurance payment on a $200,000 no-money-down loan can be around $165. If you add that $165 to the principal and interest payment of $1,167, your total payment comes to $1,332. Nearly identical but the big difference is that mortgage insurance is not a tax-deductible item whereas mortgage interest is. One huge caveat: most sub-prime loans carry a two- or three-year prepayment penalty, but really, with little or no money down who refinances after two or three years, anyway?

Let's take this one step further. Let's say the couple has damaged credit, maybe a score of 600 instead of 720. Most conventional fare for zero down requires good credit, and even if the conventional loan did have an interest rate to compare with sub-prime, the borrowers wouldn't get approved. Using that same scenario with no money down but with a credit score of 600, the rate on the sub-prime loan rises another 1.25 percent to 8.25 percent. The new payment is now $1,502 -- higher than both the 5.75 percent rate with private mortgage insurance and the 7.0 percent sub-prime rate, but really not that much more.

If you find yourself wanting to buy a home with no money down, don't fret; there are choices available to you. You need to give sub-prime and alternative lending a shot.

Published: February 27, 2004

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.