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Can you put down 20 percent?

By Marcie Geffner · Bankrate.com
Thursday, March 17, 2011
Posted: 2 pm ET

Should homebuyers be required to make a down payment of at least 20 percent of a home's purchase price to qualify for a mortgage?

That's a question some Bankrate readers tackled when presented with the prospect of such a requirement on certain loans to be known as "qualified residential mortgages," or QRMs.

Here's what the readers had to say:

I have no problem with a 20 percent down payment. My wife and I, making only $50,000 per year, were able to save it in 2 years, living in an apartment of our own with a disabled child. It was tough, but we did it, and I don't regret it one bit. It's called 'living within your means' instead of 'keeping up with the Joneses.'

-- C. Burke

I also saved up to make my down payment, and it helped (me) plan out my income/expenses to accommodate this additional house expense. In addition, (the QRM proposal) doesn't affect FHA (Federal Housing Administration) loans. Thus, if you feel you are living below your means while paying less than 20 percent down, then go for an FHA loan.

I know others will cry foul, but I see the options between a.) cheaper loan, but larger down payment or b.) more expensive loan, but cheaper down payment as a simple set of choices to give consumers and much easier to navigate than some of the more exotic financing options we have nowadays.

-- Brandon

I, too, have no problem with a down payment, 25 percent in my case, on the median-priced single family home (SFH). But in Honolulu, on a median salary, I wouldn't be able afford the monthly repayment, plus taxes, etc. on the $450,000 balance. How long does it take to save 20 percent down payment on a $600,000 (median price) SFH or half-decent condo here? That down payment alone would buy a house for cash in most of the U.S.

-- Paul

To get the prevailing lowest interest rate, a 20 percent down payment should be required. Mortgages can be had with lesser down payments of five to twenty percent, but (mortgage insurance) will be tacked onto the mortgage, until the buyer achieves at least twenty percent equity in the property. This is the way it was before the mortgage industry started being 'creative.' This is the way it should be now.

-- Tim

I have great credit (780-plus) and my only monthly debt is a student loan, but there is no way I can come up with (a) 20 percent down payment. I could wipe out my savings and do 10 percent, but 5 percent is more realistic for me. (I like to have money for a rainy day.) I live outside D.C., so house prices are crazy. The amount I pay for rent is the same as a $400,000-plus mortgage! I know my means, so I am not high-risk, and in fact, I have been pre-approved above my means. Just don't require me to have 20 percent, because that won't happen for a while.

-- James V.

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16 Comments
Tony the Tiger
March 24, 2011 at 11:06 am

At least one person equated their rent payments as equal to the mortgage payment on a $400k home. Please remember that there is more to a monthly payment than the price of the home. Once you tack on insurance and taxes, your monthly payments can increase substantially (in our case 30% over the principle and interest on the house itself- we live in a high tax area). That, plus money needed to maintain the house in case of something breaking, means you need more money, more money, more money. I agree that 20% down should be a requirement to prevent some of the issues that the housing market finds itself in now. Home ownership is not for all, and there is nothing wrong with that. Everytime something breaks and I have to call out an expensive repair man, I wonder why did I not rent forever.

Kurt
March 23, 2011 at 4:57 pm

Why should a bank loan more than 80% on a house that the owner will probably walk away from if the house value drops? If the down payment is only 5% and the house drops 20% in value, many people will simply give the house back to the bank. Why should the bank take that risk? There's only one reason and that's because the bank knows that they'll be bailed out by the gov't (i.e. taxpayers). This needs to change too! The good ole USA is bankrupt right now and it wouldn't have happened if people had been required to put down at least 20% on their houses.

Doug
March 23, 2011 at 4:37 pm

I agree that people who sacrifice to save a 20%+ down payment should be given more favorable loan terms than someone putting down a minimum payment. Theoretically, that person represents a lower risk, and should be given favorable terms. However, I don’t agree that a minimum 20% down payment should be a requirement of owning a home. The fact is, there are plenty of hard working people who can afford a house payment, that just don’t have the realistic means of saving 20%.

With home values as low as they are, there are many areas of the country where a person can own a home for less per month then what they can rent for. There are many reasons why a person might have difficulty saving 20% (single parent, limited income, high cost area, etc.). I’m not saying that people in these situations can’t save 20%, but it may make it an unrealistic obstacle. This doesn’t suggest that a person with less than 20% down would be living outside of their means.

Think of it this way… 20% is an arbitrary number. What if the minimum required down payment was 50%? Wouldn’t that represent a lower risk than someone putting 20% down? Does it now make the person with 20% down a higher risk and unworthy of consideration? How would you feel if saving 50% was the minimum requirement, but that savings represented a situation that was beyond your reasonable means?

The amount of the down payment has less to do with the quality of a loan than other factors. The foreclosure/value issue we are facing now isn’t as much related to the amount of down payment (which I would suggest is the least attributing factor) as it is to the other qualifying standards (proving income, stable loan terms, reasonable debt to income ratios, recent credit history, etc.). These qualifying standards have more to do with living within one’s means than does the amount of down payment.

Let’s take a look at two example borrowers. Person A purchased a $100,000 house in 2004 with 20% down leaving them with an $80,000 loan amount. Person A’s debt ratio was 45% of their monthly income and had an excellent 800 credit score. Person B purchased a $100,000 home in 2004 as well, but put $0 down, leaving them with a $100,000 loan amount. Person B’s debt to income ratio was 30% and their credit score was 660. Skip ahead to current time. Home values have dropped 50% and person A and B’s homes are only worth $50,000. Both are upside down, both and negative equity. Maybe both homeowner’s suffer a job loss of their spouse reducing their income in half. Even though person A has a lower rate, payment, and loan amount, they are in a much more difficult situation than person B. The amount of down payment has little to no impact on the likelihood of foreclosure in this scenario.

You only need to look at a USDA Rural Development loan for proof of this concept. USDA still to this day, offer a $0 down home loan. Since USDA never offered crazy loan terms or low qualifying standards, the losses on this type of loan remain relatively low. In 2008 USDA had a foreclosure rate of 1.4%. In the same year, conventional loans has a foreclosure rate of 1.6% (FHA had a foreclosure rate of 2.9% with subprime loans coming in at 12.9% for the same year).

Before you go wishing that 20% down becomes the norm, think of the affect it will have on the housing market. There is already an oversupply of homes, but think of what will happen when you take away a large percentage of the available buyers? This will not increase home values, it will do exactly the opposite. Values that continue to decline will lead to further foreclosures and strategic foreclosures.

Instead of focusing on the down payment amount, focus on the other more important aspects of loan qualifications. The proof is in the pudding… subprime loans of the past removed these reasonable loan qualifying standards, and that is why they are producing foreclosure rates 10 times that of other loan types.

Lynn
March 22, 2011 at 7:24 pm

I know how hard it is to save but I live in the SF Bay area and the taxes here are high and the housing is high. It took me 10 years to save the down payment but I did it by buying an older small house, driving an older car. I couldn't figure out how people were affording huge new houses with two hummers in the driveway because I know how hard it was to get my original loan as a single woman. I had a 30 year fixed - when I got my house it was 11% so that was tough. I was offered lots of ARMs and it doesn't take an MBA to figure out what you can and cannot afford. Now I have owned my house for 20 years and it's only worth what it was when I purchased it, mainly because of the numerous foreclosures around me that are being put on the market by banks at huge reduced pricing. I've paid over $300k in payments so it's hard to keep hearing people complain about why it's not fair to them now for requiring a down payment. Get a second job to save the money, give up Starbucks, etc. If you can barely make the house payment and can't save any money, what will you do when the sewer line needs replacing, roof needs reroofing, etc.

D.E
March 22, 2011 at 6:33 pm

Most everything I've read has said that if a home buyer can't put 10-20% down, then they aren't ready for a home. I believe it's less about the amount of money a buyer can put down and more about the buyer staying comfortably within their means of living after buying a home.

I graduated college about 2 years ago now and I've only recently taken a job that is in my degree field. My last job, since graduating, was only a means to stay financially afloat to where I couldn't save much but was able to pay my bills. Now that I'm making a decent salary, I feel that I'm able to afford a home and still live well within my means.

Because I'm a veteran, I'm able to get a VA loan and lump all of my costs into the loan with no money down. Since starting my job, I've only been able to save about 2% of the down payment for what I can afford; however, given the market right now, I don't want to pass up the good deal I've found. I shopped around for a couple of months and my Realtor found a home in my price range that's a short sale. Since I'm not in a hurry to purchase, I have the time to sit through the short sale process and save even more money.

I still won't have 10-20% down, but after sitting down with my monthly expenditures (student loans, auto loans, credit cards, insurance, HOA fees, other home owner costs, etc...etc...) and a monthly mortgage 50% higher than what I'm anticipating my mortgage to be, I was still able to end each month in the green by over $1000.

Although I can't afford the 10-20% down, I feel I can comfortably afford the home without living to pay a mortgage. At the end of the day, it comes down to being financially responsible and living within my means. For me, the 10-20% is less important than what the balance of my checkbook looks like at the end of each month.

Reid
March 22, 2011 at 5:37 pm

Ok think you wealthy un-educated people. Raise the amount for the percent down. What does that do... It takes demand away from housing and property. Hmm supply and demand.... Your property prices will depreciate. Well if that sounds good to you fantastic.

Last point there are many foreclosures to people that plainly refuse to pay. Not because they can't afford it but don't want to pay for something that went down in value. Sounds like the wealthy have ways of abusing money to me.

Alannah Kern
March 22, 2011 at 9:26 am

I think the readers comments have hit the nut on the head. a.If you can't save 20 percent you are not ready to own a home. b. If you cannot afford the payments in your area once you have saved the down payment then either prices are still too high or you will have to own elsewhere. c. But what about my job??? There have always been persons who simply cannot buy a property in the area where they, as young person, simply cannot afford to live. Ask any realtor. This is not a phenomena to the current market.If FHA wants to insure properties with low down payments then they need to hike the Mortgage insurance premiums on both the consumer and the financial institution and make sure that the financial institution is not allowed to sell those particular loans to any one until mortgage insurance is no longer required. That would keep them on the banks books until they were in essence risk free.

D.P
March 22, 2011 at 4:58 am

We bought and sold houses for 30 years and generally paid 20% down on a conventional mortgage. In between the time we sold our last house and our present house my mage was diagnosed with two devistating diseases. The sale came quick and time to pack up faster. i wound up closing two houses in two states in 24 hours. Due to the time constraint I took a 3-year 8.5% ARM. Then the housing bust began in earnest and so did the big medical bills. I could see the writing on the wall. Eighteen months into the ARM I took a 20-year fixed FHA, reduced the payment over one-third, and closed in 10-days in my living room.

The one thing that confuses me the most is that banking rules vary from state to state; maybe the flexibility only applies to rural America? It seemed inconceivable I could walk into a new bank and walk out an hour later with a loan approval and tentative 7 day Close date. It never happened again. It was a family owned bank in a very small rural town. My general feeling is if I can't pay more than 10% down then something is wrong. It is usally the price of the house.

Justin
March 18, 2011 at 12:12 pm

I sense that requiring 20% down isn't a big problem in realistically priced housing markets where one could buy a reasonable starter home for 180K or less. I think the real debate should be around how the median housing prices get out of control (400K+) in the first place, pricing many middle class people out of the market. I'm not even talking the lower income brackets here.
In areas where housing prices tanked (30,40,even 50%), the home values over the past 30-40 years still greatly outpaced inflation. Sure, those that own property don't see this as a bad thing, but for everyone else that doesn't yet, and future generations, this is a problem. My kids will have to pony up $1mil for a 2 bedroom condo while paying $500K to get a 4 year college degree.

Weiwen Ng
March 18, 2011 at 7:08 am

It would take us quite some time to save 20 or 25 percent down, but we could do it. My wife and I live in Washington DC. Homes in the city are very expensive. Like the Honolulu guy, it would take $4-600,000 to purchase a decent single family home in a decent part of the city. So, that is 2 years or so of savings.