No Money Down Disappearing as Mortgage Option

"We were really upset, but there was not a lot we could do," said Rebellino, a civilian Army employee who was transferred to Alexandria from Ohio. "We needed a place in a certain time frame, and it looked like the loan terms would only get worse."

Many years ago, a 20 percent down payment for a home was the norm. But as prices escalated, fewer people could afford that. After all, 20 percent of $500,000 -- the cost of a middle-class suburban house in the Washington area -- is $100,000.

No-down-payment mortgages came into play about a decade ago, at first for wealthy borrowers with stellar credit. The idea was to give those borrowers loans that allowed them to buy houses without having to liquidate other investments, said Sean O'Boyle, a vice president at SunTrust Mortgage in Chevy Chase.

"But the model deteriorated, and it became available to just about anybody in recent years," he said.

In part, that was because lenders assumed that as long as home prices kept climbing, borrowers who could not afford future mortgage payments could sell or refinance. But once home prices dropped in many parts of the country, that option evaporated. Delinquencies and foreclosures surged. With urging from federal regulators, lenders tightened their policies.

SunTrust boosted the credit-score requirements for no-down-payment loans, Boyle said. It also started requiring borrowers to have six months of payments in reserve, up from two months, he said.

Many lenders now place more emphasis on job stability and low debt when writing no-down-payment loans. Almost all verify a borrower's income and employment, which was not the case during the housing boom.

Justin Johnson, 28, met all those requirements, which he assumes is why he recently secured 100 percent financing from his lender to buy a townhouse in Frederick County.

"We really wanted to buy a house, and we don't have a lot of savings to be able to put a down payment," Johnson said. "The only way we could afford it is to get 100 percent financing from the lender. We were informed that it would be very hard to go this route."

Like many cash-strapped borrowers, Johnson applied for a "piggyback" mortgage, meaning he took out two loans. The first covered 80 percent of the cost of the home, and the second was a home-equity line of credit that covered the remaining 20 percent, at higher interest.

The arrangement enabled him to avoid paying the mortgage insurance required by lenders if a loan exceeds 80 percent of a home's value. But the second, smaller mortgage is risky for lenders. If Johnson loses his house, proceeds from its sale would go toward paying off the first mortgage. Typically, there would be little or no money left to cover the second.

Piggyback loans were one of the main reasons that Countrywide Financial, the nation's largest mortgage lender, took a big hit to its second-quarter profit. That announcement helped trigger the stock market's tumble last week.

Countrywide said that even people with good credit were defaulting on home-equity lines, largely because of unforeseen events such as illness, divorce or job loss.

The California-based lender plans to eliminate home-equity lines for subprime borrowers. Executives also said they would curtail 100 percent financing for more creditworthy prime borrowers and impose more restrictions on first-time home buyers.

Without the piggyback option, many first-time buyers who want 100 percent financing may find themselves priced out of the market because they would have to pay mortgage insurance, said Eric D. Gates, a mortgage broker at Apex Home Loans in Bethesda. "That will make the monthly payments much higher," he said.

For Reggie Watson, insurance added $125 a month. Still, he considers himself lucky. Watson and his wife, Kisha, both 26, paid low rent when they were in college. When they moved to the Washington area, they were flabbergasted by home prices.

But they found a no-down-payment loan in June and closed on a townhouse in Ashburn last month.

"I've finally gotten over sticker shock, and I think once we make that first payment, we'll be all right," Watson said.

"I'm definitely relieved because it's been so stressful looking for a home."