Mortgages with 10% or less down are on the rise

• More lenders offering conventional mortgages with 5%25-10%25 down
• Higher FHA-loan costs driving more borrowers to conventional loans
• Trend shows mortgage lending is %27loosening up%27 since housing bust

In another sign of the housing market's brightening outlook, more home buyers are discovering conventional loans with down payments well below the 20% or higher levels of recent years.

Until recently, many borrowers had to go through a government guaranteed loan program, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs, to get a mortgage with less than a 10% down payment.

Now, a growing number of lenders are offering such mortgages without the backing of a government guarantee — the definition of a conventional loan.

Loans with down payments between 5% and 10% accounted for almost a fifth of the conventional loan offers that lenders made on the LendingTree online exchange in the first quarter, according to LendingTree.

That's up from just 6% of conventional loan offers in last year's first quarter and only 1% of the offers in 2011's first three months.

A similar trend shows up on the Zillow Mortgage Marketplace. The number of lenders quoting non-FHA loans with down payments of 5%-10% is almost double what it was two years ago, Zillow says.

That can be a big help. On a $200,000 mortgage, a 20% down payment is $40,000, but 5% is only $10,000.

"For years, it's been FHA or nothing," for the low-down-payment borrower, says Guy Cecala, publisher of Inside Mortgage Finance. "This shift is a sign that mortgage origination is loosening up."

The industry is still a long way from the easy-lending standards that caused the housing bust. Borrowers now must show a strong credit history and documented income to get loans.

What's driving the growth of low-down-payment loans:

• Higher FHA costs.

While the FHA requires just 3.5% down, its annual insurance premiums have more than doubled in the past two years. The last increase took hold April 1.

The higher costs are "causing a shift back toward conventional loans," says Cameron Findlay, chief economist at Discover Home Loans.

He expects that to continue as FHA rules tighten, raising costs for borrowers.

• A rebound in private mortgage insurance.

Lenders generally don't make home loans that they can't resell to mortgage giants Fannie Mae or Freddie Mac.

While Fannie Mae will buy a loan with as little as 3% down, and Freddie Mac at 5%, loans with less than 20% down require borrowers to also pay for private mortgage insurance.

When the housing market crashed, the private mortgage industry lost billions and such insurance was tough to get. Now, that industry is recovering and the cost for private mortgage insurance has dropped for borrowers with higher credit scores.

More home borrowers are deciding it's better to pay for insurance instead of putting 20% down, says Matt Johnson, loan officer at Sterling Bank in Seattle.

• Rising home prices.

As prices climb again, mortgage lending is less risky, and that has helped lenders get more comfortable with low-down-payment loans.

Home prices were up about 10% in February from a year ago, CoreLogic says.

Lenders have also refinanced millions of customers and "need to find new ones," says Glenn Kelman, CEO of online brokerage Redfin.

The growth of lower-down-payment loans is also reflected in Fannie Mae's portfolio.

In the first quarter of 2012, loans with down payments between 3% and 10% accounted for 15% of the home purchase loans owned by Fannie Mae. That rose to 18% in the third quarter, Fannie Mae says.

The borrowers still have high credit quality. Last year, home purchase loans acquired by Fannie Mae with less than 20% down payments were issued to borrowers with an average FICO score of 755, Fannie Mae says.

FICO scores of 740 or higher are generally needed to get the best pricing on home loans.