This post from Time about no-money-down mortgages going the way of the dodo caught my interest. It cites an article in the WSJ about how banks have realized that when they approve mortgages with little to nothing down, their risk of default goes way up.
To compensate, most people who own less than 20% equity on their houses have to pay PMI to help mitigate the lender’s risk.
If 20% does become the standard with no alternatives, then I think housing prices will continue to drop until the market can support those prices. In places along the coasts with insanely high real estate prices, I think it’ll hurt a lot of would-be sellers, since there probably aren’t a ton of people with $200k able to put down on a $1M “starter” home.
Still, I don’t think the housing market in places like that is sustainable for the long term. The mortgages there (and some of them are interest-only! WHAT!?) were issued with the thought that real estate would always increase in value, and that the homeowner would make money when they sold.
It does make sense on paper that if lenders start to require 20% minimum, then that would be better in the long run.
But 20% down is hard-to-impossible for many families, even if it’s “just” $20k down on a $100k house. So I don’t think 20% down for everyone is the best idea. I do think some down payment should be required (maybe 5-10%?) and lenders should thoroughly check out the customers to make sure they have a good credit history, real source of income, and money in savings at the bare minimum.
Then again, there’s nothing wrong with renting, even for a long time. Renting and being able to afford your home is way better than having a mortgage and being stretched too thin or losing your house altogether.
What do you think? Should 20% down be the standard?