Feb 16 2011

Should 20% down mortgages be standard?

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?



16 Responses to “Should 20% down mortgages be standard?”

  1. Oy. This is such a tough topic. On the one hand, I can see how a 20% standard would ensure that home buyers are responsible and reduce the likelihood that they default on their mortgages, which would help stabilize the housing market. But GEEZ. Houses are expensive, and even just 20% takes a LONG time for even responsible people to save — especially since even responsible people are more likely to have car payments and student loan debt to pay off these days.

    I agree with you that 10% seems like a more reasonable standard. It shows more financial responsibility than people who try to buy a house with NOTHING in the bank, but it’s not so much money that it’s going to take years and years. To me, $10,000 seems like an attainable goal that we can reach in just a couple years. $20,000 would take us more like 5.

    For a long time I felt like renting wasn’t a big deal, but now that I have a baby, I feel more pressure to buy a house so he’ll have a yard to play in and a quieter home environment. But I’m not feeling enough pressure to make a stupid financial decision that could jeopardize his well being!
    Karen´s last post ..This day

  2. Although home prices would likely decrease, I like the “20% down” standard. I believe the increase in home prices was due largely to easy access to credit. Plus, I don’t think 20% down is unreasonable in many parts of the U.S. I live in a high cost of living area, i.e., Washington, D.C., but I still think it’s prudent to have a large down payment. Your inability to accumulate one is a good indicator you can’t afford the house.
    Shawanda´s last post ..The 1 Goal Setting Tool for Achieving Your Financial Dreams

  3. I think 20% down is a great idea – although I know it’s not a popular one.

    We just put 20% down on our home and I can’t think of one person that I know who didn’t question our decision by asking, “Why are you putting that much down? You could get a bigger home . . . you could do more repairs . . . etc, etc, etc.” For us it really boiled down to we trust Dave Ramsey (and that’s what he says to do), we didn’t want to pay PMI, and it gave us peace of mind that we would never go “upside down” on our mortgage. Other people are more comfortable with little or no down – but I tend to find those are the people that live without a budget and off of credit. I hope I don’t come across as too harsh – I would just be excited if new rules were instated that did away with zero down and helped people become more financially responsible.
    Laura Stiller´s last post ..Cannon at 7 Months

  4. Even though we did not put any money down on our house when we bought it a few years ago (*blush*–we would probably do things differently now!), I do think it might be good for SOME down payment to be required. It wouldn’t have taken us so awful long to come up with 5%. We bought our house when we did because we were having a baby and didn’t want to bring her home to the crappy place we were renting. We’ve done fine paying our mortgage, though, and I do love our house. I’ve kind of become glad we went ahead and bought, because we don’t have a ton of credit history and I’m not at all sure we’d have been able to buy yet if we’d waited a year or two more. But, normally, yes–I think saving up 5%-10% would be good. 20% would’ve felt extremely depressing and unattainable for us at the time we were looking to buy and would take a VERY long time for us to come up with even now.
    Jenny´s last post ..WW- Ivey loves to say CHEESE!

  5. One thing that’s also interesting is a link at the bottom of the Time post, where it states that 1/3 of Americans won’t qualify for a mortgage anyway, even if they do have 20% down. Their credit scores are just lousy. That stinks.

    But then again, if someone defaulted on their mortgage, I can see why a lender wouldn’t want to try it again with that person.

  6. Through a house my husband inherited when his uncle died, we were able to put 25% down on our NYC condo. Because of this, we are in a much better place financially than several of our friends who also bought before the housing crisis. It makes a lot of sense, but at the same time, if you are responsible with your money there is no reason that 10% can’t be a reasonable investment. The other point is, when we think about renting, I tend to anyway think of apartments. But I have had several friends and family members rent houses with yards for the long term and that has worked well for them.

  7. Good for you, Laura! I think you won’t regret it, and you’ll be even happier when the thing is paid off!

  8. 5-10% vs. 20% is EXTREMELY daunting on paper. It’s really hard to buckle down and get that much scraped together. So we broke it down into chunks so it doesn’t look like 20% but more like 5% a few times over. It’s a mental trick that seems to help somewhat.

  9. Wow! Great questions. I’ll just type as I think…

    I like the logic, and it would be easy for me to say “oh yes it should be the standard!” But then, I wouldn’t have the house I’m in right now. (We put 5% down, I think.) I liked the apartment we were in, but it was so small. Renting a 3 bedroom apartment or a house is SO expensive, at least in my area. If I’m going to put $1200/month into housing, I’d rather have a house, know what I mean?

    I never thought about the 20% requirement forcing house prices down. I’m a fan of that. :-)

  10. I think that 20% is a great idea but realize it’s not possible for many people. Here’s how ours played out: We didn’t put anything down on our first home. We purchased it in our early 20’s and only paid $55,000. With such a small mortgage we were able to pay it off a few years ago.

    We found our dream home that we bought last December. We paid $260,000 and were able to put $52,000 (20%) down using the equity from our first home.

    We actually had to take another mortgage out on the first property while we waited for it to sell which was a little scary but thankfully we only had to juggle for a few months. I’m also not sure how many people banks would do this for.

    Now that we’re back to “just” one mortgage, we hope to pay it off in 10 – 12 years. We took it out for 30 years though to leave flexibility in case something would happen that wouldn’t allow us to make the larger payment.

  11. I think 20% is really unattainable for a lot of people. I agree people going into foreclosure and having all sorts of problems means people aren’t responsible, but I don’t know if 20% down would really make people any more responsible.

    I know for the three banks we talked to when we were considering moving require you have to have at least 5% down or you cannot get a mortgage, period. I think things will continue to look bleak as long as people are not budgeting and keep being “normal” with their money–I doubt a 20% down policy would really make houses cost any less (and if it did I think it would take at least a decade).

  12. We only put 10% down on our first home purchase, but put enough sweat equity into the property in 1 year that we had the house value reappraised and eliminated the PMI. Because of the equity we had in that house after just 3 years (and some real estate market luck) we were able to purchase our current house that’s twice the size and twice the price tag, in the hopes that we can raise our family here, no matter how large. If we’d simply rented and saved for those 3 years, there’s no way we could have put 20% down on this house and be on track to pay it off in 15 years.
    The ability to purchase a house is a huge financial future divider. In all the communities we’ve lived in and researched, it was more expensive monthly to rent than buy. (Our first 3 bedroom ranch house was cheaper monthly than the rent on our 2 one-bedroom apartments.) Requiring 20% down can create an expensive boundry that’s harder to cross each year you rent.

    I think 5%-10% down payments are a poor decision if you really had to scrimp to get there, and don’t have reason to believe that your earning potential will greatly increase in the very near future. However, the potential buyer’s credit history and earning potential should carry more weight than what they can put down.

  13. Good post! I think it’s a great idea to require 20%, but realistically I don’t agree. My husband and I bought our house this past summer with only 5% down. Like someone said above, we got an awesome deal, and with our sweat equity we will be able to get rid of our PMI by this summer.

    We focused on paying off all our debt before we started focusing on building a house fund. If we could have used the money spent on debt repayment it wouldn’t have been an issue to put down 20%, and if that was the requirement there’s a good chance we would have done things differently and I’m sure would regret it. I love not having to worry about paying any bills except for our housing ones. I couldn’t imaging having others hanging over our head.

    So they may want to make 20% a requirement, I still don’t think it will solve as many problems as they think. Especially because how many people are going to take out an additional loan in order to be able to put down the 20%? I really don’t think it would be a smart idea. I do agree that you should be required some sort of down payment though.

  14. I think it should be standard. It forces people to be ‘prepared’ to own a home.
    MoneyCone´s last post ..A Review Of Forbes And Some Link Love!

  15. The other caveat to this situation is fewer people would be able to buy. Which would put rental units in demand and allow rental companies and landords to raise their rates.

    Thus, further making it more difficult for people to save the required 20%.

  16. Really good thought, Amy!

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

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