Q: We are first-time home buyers and we think we can spend no more than $220,000 on our first property.

We found a condo in Skokie, Illinois that we like. It’s listed for $229,000. Our agent suggested we make an offer of $219,000, but warned us that there are 2 other buyers looking at the property. He told us we have to have a good offer to get the condo or we won’t be able to buy it.

We have good credit and are looking for a no down payment home loan. The agent connected us to a lender who offered us 7.5 percent on a 30-year no down payment loan.

This seems like a very high interest rate for a no down payment loan. Can you give us more information about buying without a down payment and what we can expect to get in terms of an interest rate?

Do you know of any bank that will give us a lower interest rate for a first-time home buyer? We will really appreciate it if you could help us. Thank you and have a good day!

A: If you’re not going to put down any cash on your home, you have to expect to pay a higher interest rate than the going best rate of about 5.5 percent for a 30-year fixed rate mortgage.

The reason for the higher interest rate is that years of research have shown that the small the down payment the higher the chance the homeowner will be late on his or her mortgage payments. It has also been proven that the smaller the down payment, the more likely it is the home will ultimately go into foreclosure.

So, lenders compensate themselves for the additional risk of a zero down loan by raising the interest rate.

Is 7.5 percent the best interest rate you can get on a zero down loan? I don’t know. While it doesn’t seem unreasonable, I haven’t seen your credit history or credit score. You should talk to several different top lenders and get quoted on a zero down loan.

You might also want to investigate other types of loans. While a 30-year fixed rated mortgage might sound the most stable, I’d go for a 5-year adjustable rate mortgage. The interest rate will be lower and you will almost certainly refinance this initial loan once your property starts to rise in value.

Why? If you can improve your home or if it appreciates enough in value, you can refinance your mortgage and use the “equity” to lower the loan-to-value ratio. That will automatically qualify you for a lower interest rate, and you’ll pay less private mortgage insurance (PMI) as well.

While I don’t recommend specific lenders, I do think you ought to be talking to name brand companies at this point, because you know they’re not predatory lenders looking to take you for a ride.

While your agent may be a font of information, he or she isn’t a lender. So talk to four or five different lenders about your situation, and see what can be done to get you on the path to home ownership.

Published: Apr 23, 2004