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Nobody pays cash for a house. Instead, you pay for most or all of it by getting a loan from a bank, called a mortgage. You will also probably make a down payment of 3 to 20% of the sale price, though sometimes it's possible to pay nothing down. Since everybody wants to know how to get a house with zero down, we'll cover that first.

No-money-down loans

No-down loans are a relatively recent development, but they've exploded in availability, and popularity. It wasn't always like this. In the olden days (most of the last century), if you wanted to buy a house, you had to put 20% down, period. Then in the 80's banks started letting homebuyers put down less -- 5, 10, or 15% (but not zero down). Back when I started this site around 2000, no-money-down loans were rare. At that time, only 4.5% of homebuyers in California got their homes with nothing down. By 2007, that figure had jumped to 20%. Among first-time homebuyers it's even larger: In 2006, a whopping 43% of first-timers paid nothing down. That's up from 28% just two years prior to that.

The Subprime Lending Crisis Here's what happened in a nutshell. Subprime basically means "bad credit", so a subprime loan is a loan made to someone with bad credit. Lenders gave these out like candy from about 2000-2006. And of course, people with bad credit are more likely to fail to make their payments and have their houses repossessed by the bank ("foreclosed"). When a bank forecloses on a house it then sells the house to get back the money they loaned out for it to be bought in the first place. But wait! The real estate market took a dip in 2006, so those repossessed houses were suddenly worth a lot less. So a bank might have loaned out $200,000 on a house, but was only able to sell it for $180,000. Uh-oh. Multiply this by thousands of homes, and you can see that lenders lost a lot of money. Ta-Da! That's the Subprime Lending Crisis. Lots of these subprime lenders went bankrupt. One of the casualties was New Century Mortgage, a huge lender with nearly $2 billion in markket capitalization, and which had actually handled the loan on one of my homes. (Not that I got a subprime loan -- my credit is excellent. New Century handled regular loans too.) As a result of this subprime mess, it's now a lot harder for subprime borrowers to get loans. Lenders are being a lot more careful about whom they lend to.

But now the pendulum is swinging the other way, as a result of the subprime lending crisis. (See sidebar.)

So can you get a no-money-down loan? If you have a credit score of at least 600, then probably, though you might have to do some shopping around. If you're a veteran, your chances of getting a no-money-down loan are greater since there are special VA loans.

But this begs the question: Should you get a zero percent down loan just because you can? Not necessarily. Here are reasons to think twice about getting a 0% down loan:

• More likely to lose your home. If you can't make a down payment it's either because you didn't have the financial discipline to save, or you're not making enough money. Either of those things makes it more likely that you won't be able to make the payments on your house, and that you'll get foreclosed on. A study in Denver showed that over half of foreclosures involved nothing-down loans. Ouch.
• Higher monthly payments. The less money you put down, the more you're borrowing. And the more you're borrowing, the higher your monthly payments.
• Nothing down means a smaller home. The less you put down, the less the bank is willing to loan you. That means your options will be more limited as far as what homes you can buy. With a down payment -- any down payment -- you can get a bigger loan, and are more likely to be able to get the home you really want.
• Harder to find the loan. No-money-down loans are harder to find than something-down loans, which are ubiquitous.
• Harder to qualify. It's harder to get a bank to give you a no-money-down loan than a loan where you put anything down.
• Private Mortgage Insurance. If you put nothing down on a conventional loan, you'll have to pay for private mortgage insurance. Actually, you'll pay this for any down payment less than 20%, but the less you put down, the more the PMI, and the longer you have to pay it.

So I encourage you to put down at least 5% if you can. I'm not saying that you should never pursue a zero-down loan, but if you get one just make damn sure you can afford it!

80/20 Loans

Often if you're able to put 0% down, then it works just like you expect: You get a single loan for 100% of the purchase price. But sometimes your lender or broker will offer you an 80/20 deal, where you get one loan for 80% of the price, and another for 20% of the price. Why on earth would they do that, rather than keeping it simple? Because it's typical for the 20% loan to carry a higher interest rate, which makes more money for the bank.

But there's an advantage for you: With a 100% loan you usually have to pay for private mortgage insurance (PMI), while with an 80/20 loan you usually don't.

So which is better? It's different for each situation. For an apples to apples comparison, you need to find the total monthly payments, including PMI, for each loan deal you're offered.

Don't plan on borrowing the down payment from relatives

The down payment has to be your money. Why? Because when the bank gives you the main loan on your house, they've calculated that you won't be able to pay back your loan if you take on additional debt, and borrowing the down payment is additional debt. Also, if you don't make your payments and they have to repossess the house and sell it, they'll often want to sell it for less than it's worth so they can sell quickly, and your down payment prevents them from having a loss if they do that.

But what if someone gives you the money for a down payment (your parents, maybe). That's okay as long as you get an FHA loan, but not if you get a conventional loan. (Realize though that many sellers won't agree to an FHA loan because it sometimes adds a little red tape and because the inspectors are more strict about the condition the house has to be in before it can be sold.)

Should you use your free cash to make a bigger down payment or to pay down debt?

A very common question among homebuyers is, "Should I use my extra cash to pay down my credit card debt, or should I save it all for the down payment?" That requires a detailed answer, so just for you, I've written a detailed answer.

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