For First-Time Buyers, Tempting Prices but Tougher Rules

When it comes to down payments, lenders want to see at least 5 percent down for a normal conforming loan of up to $417,000, said Victor Benoun, owner of the Mortgage Source, a brokerage based in Studio City, Calif.

"If you're borrowing more than $417,000, lenders want to see at least 15 percent equity in the property, although they're cutting that back to 10 percent to make up for a declining market," Benoun said.

Which makes the FHA's lower down-payment requirement seem doable. In addition to facing the difficulty of having the cash for a down payment, many first-time buyers are having trouble coming up with enough income to support their mortgages, Benoun said.

"Lenders would normally say they'd like to see 25 to 28 percent of your gross income going against your housing expense, and now that has been relaxed a bit more to include ratios of up to 40 percent of your gross income. Once you get past the ratio of 42 or 45 percent of your gross income, you may not be able to do a conforming loan," Benoun said. "I have clients now who are self-employed, and they're not showing enough income to qualify."

Next week: Is there any place to get a 100 percent loan? We'll take a look at the few remaining options, including what's new at the Department of Veterans Affairs.

Q We've decided to downsize and are building a house. We put down a deposit of just over 10 percent and have a loan commitment for another 25 percent of the cost of the house. We have significant equity in our current home and plan to use that for the rest of the purchase price.

However, because the market is slow in our area, we have come to realize that we may not be able to sell our residence before we close on the new house. We can afford a large enough mortgage to pay for both houses, but it won't be fun.

Our lender is willing to consider a larger mortgage amount but has suggested that we take out a home-equity line of credit for the difference needed for the new house. The monthly payments would be interest-only (prime minus 0.5 percent), and it obviously would be paid off in full when we sell our current house.

Is there anything specific we should be concerned about with this approach?

AYour mortgage lender is offering you a pretty good option. Using a HELOC to finance the balance of your new house purchase is an easy move to get you out of a financial jam, especially since you'll pay it off as soon as your home sells.

Your house will sell, especially if it is priced right and is in excellent condition. But you have to be realistic. You may have to accept that your home isn't worth what it was two years ago, which also isn't much fun. But if you're realistic about where prices are in the neighborhood and approach your sale as a seller and not as a homeowner, you should be fine.

Remember that carrying two homes will be quite expensive, and that should give you an incentive to make a deal with any reasonable buyer.