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TERMINOLOGY

Coming up with the down payment is often one of the most difficult challenges to becoming first-time homeowners. Fortunately, today there are numerous lending programs available that allow borrowers to contribute as little as 3-5 percent of the purchase price as a down payment.

For example, in order to buy a $150,000 house, a borrower could get away with putting $4,500 down compared with $30,000, the traditional 20 percent down payment. Of course, low down payment loans do require borrowers to meet certain criteria. Typically, home buyers will need to have a good credit history that demonstrates their responsibility with borrowed money. They will also be required to provide proof of sufficient income for the home purchase and they will need to have enough cash on hand to cover both the down payment and the mortgage closing costs (these amount to 2-3 percent of the purchase price).

These programs have made homeownership affordable for millions of Americans, but there are some drawbacks to making a minimal down payment on a home loan, like having to pay private mortgage insurance (PMI). With a low down payment loan, the lender takes on more risk than a 20 percent down mortgage. In order to reduce this risk, the borrower will be required to pay PMI until your equity reaches roughly 20 percent. That means paying an extra several hundred dollars in mortgage fees each year. Still, for many first-timers, the additional future costs is often worth the thrill of owning their first home.