You've seen the ads and heard the sales pitches promising "no money down, no problem" or "anyone can own a home." A no-money-down mortgage basically is just what it sounds like: a home loan without a down payment. Zero-down mortgages have helped many first-time buyers and lower middle-class families live the American dream, but they can also be a big setback if not considered carefully.

Before you chase down a tempting no-money-down mortgage, research your state's assistance programs and read up on Federal Housing Assistance loans. You may qualify for a reliable low or no-money-down mortgage without falling into a predatory one. One in five sub-prime borrowers in recent years could have qualified for a lower-cost conventional loan, according to a March 2007 survey by the Center for American Progress. You can achieve home ownership even without $20,000 saved up. For example, your IRA or 401(k) program may allow a penalty-free withdrawal of up to $10,000 for a first-time home purchase. This is a tricky option because it decreases potential returns from your IRA, the effects of which could compound if the house you invested it in begins to lose value.

Warning signs of a predatory lender include institutions offering a loan that seems too good to be true, trying to convince you not to shop around, asking you to disclose false information on your application, or urging you to borrow more money than you know you can responsibly repay. The Center for American Progress survey also shows that 20 percent of borrowers face foreclosure due to predatory loan terms and multiple refinances. This is one of the biggest risks of a no-money-down mortgage, so it's important to be well-informed before agreeing to the loan. Read our Mortgage Matrix article and visit ftc.gov for info on mortgages.

Private mortgage insurance (PMI) is required in most zero-down home loans because it protects the lender if the borrower defaults on the mortgage (i.e. stops paying it). Although this enables many people get into a home loan, it is an extra cost. The PMI amount is relative to the size of your loan, and generally costs about $100 to $200 per month in addition to your house payment, so you need to plan accordingly. Once you have paid enough toward your loan balance to have 20 percent equity, you can request to cancel the PMI coverage.

As with any mortgage, you will also encounter application fees, closing costs and incidental expenses. These are costs in addition to the down payment. If you have no savings at all, chances are you won't be able to afford the costs of even a zero-down mortgage. You should focus on developing a savings schedule to help cover these fees and costs associated with getting any mortgage.

Also, be aware of the loan terms. You need to know more than just what your payments are going to be because those payments might change. Make sure to inquire about your interest rate and your loan structure. Is it variable or is it fixed? These simple facts can determine if the payment changes over time and potentially inhibit your ability to pay back the loan. Consider speaking to a housing counselor before signing anything. Find one at hud.gov.

If you play your hand right, no-money-down mortgages can be your saving grace. If you go into it blindly, you may be begging for mercy!
 

Sources:

smartmoney.com; hud.gov; americanprogress.org; realestate.msn.com; ftc.gov; washingtonpost.com