Credit History

• Proving a strong credit history is vital to obtaining a loan with less than 20 percent down. Lenders will look at all three credit bureaus and determine what your likelihood is of paying them back based upon your history of paying your other debts. While not every lender will require perfect credit history, major derogatory items such as prior foreclosure, recent bankruptcy, tax liens and judgments may prohibit the lender from approving your loan. Minor negative items such as isolated 30-day late payments and small collections may only require an explanation.
  
  

Employment and Income

• Lenders evaluate your ability to repay the debt. They analyze your employment history, income sources, history and your ability to pay the new debt. They will add all of your current debts to the new proposed mortgage payment and divide the total debt amount by your gross monthly income. The lower the percentage of your income you must spend on debt, the better. This figure does not take into consideration your costs for food, clothing, utilities or any other miscellaneous expense, only the minimum payment required. Ideally, your mortgage payment (including taxes, insurances) should not exceed 28 percent to 30 percent of your gross monthly income, and your combined debts should not exceed 40 percent to 45 percent of your gross monthly income. Lenders make exceptions to this on a case-by-case basis.
  
  

Collateral

• An appraisal is required on virtually all first-mortgage loans. The lender's only real security is in the home's value. Lenders will review the appraisal to ensure that the home meets their guidelines and is worth the sales price of the home. If the purchase price is more than the appraised value, you may have to put more than 10 percent down on your home, or adjust the sales price to be as much or lower than the appraised value. Lenders typically use the lesser of the sales price or the appraised value when determining a home's value and the loan's required down payment.
  
  

Loan Sources

• FHA offers loans with down payments as small as 3.5 percent. If you are a veteran of the U.S. military, you are probably eligible for a Veterans Affairs, or VA, loan with as little as $0 down. In addition to these government-backed and -guaranteed loans, most banks and lenders offer additional programs. You cannot obtain an FHA or VA loan directly from the FHA or the VA; you will have to use an approved lender or broker for your financing. The FHA and the VA do not give loans; they only guarantee the loans for the banks.