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Back to 20% Down on a House?

By JLP | November 21, 2008

When my wife and I bought our house in 1999, we put down 5%, which we thought was a lot (back in those days it was a lot!). Well, according to Emma Johnson’s piece over on MoneyCentral, the 20% down payment and 30-year fixed mortage is coming back in style.

I think this is a good thing!

I know, it seems a bit hypocritical of me to welcome back 20% down payments when my wife and I only put down 5%. The difference is that we had a nice 401(k) balance at the time so we did have some savings—even though it was for retirement. We also bought a modest home and we have lived in it for over nine years now. Although our payments seemed high when we purchased our home, they’re a cakewalk nowadays!

If indeed 20% down payments are the new norm, how long will it take people to save up a down payment? I guess the answer depends on how much they save and how much they plan on spending. A 20% down payment on a $90,000 house (about what we paid for our home in 1999) is a lot less than 20% down on a $300,000 house.

It’s going to be tough for people to save up that kind of money. But, I think this is a good thing because we, as a nation, need to get back to prudent financial practices. We need to stop buying things we cannot afford and we need to learn what it means to sacrifice. Let’s face it, we’ve been spoiled the last fifteen years.

Topics: Budgeting, Housing Market | 26 Comments »


26 Responses to “Back to 20% Down on a House?”

  1. Studenomics Says:
    November 21st, 2008 at 12:42 am

    First of congrats on finding a home for $90,000. In Toronto it is pretty much impossible to find a nice home within city limits for less than $500,000. Prior to purchasing my rental property, I was constantly reminded that I need 20-25%, which is why I waited until I was financially secure. Many people love to do impulse shopping (as do I) but a home is something that requires extensive research and timing.

  2. Steve Braun Says:
    November 21st, 2008 at 5:59 am

    Did you say 20% down? How unfair! That system is rigged and skewed toward people who have patience and self-discipline, work hard, make sacrifices, save their money, and generally employ common sense when it comes to money. We can’t have that. Capitalist pigs!

    Let’s get the government involved to rectify this situation…

  3. Seamus Says:
    November 21st, 2008 at 7:47 am

    I agree that people need to put more thought into a home purchase, but for most people living in large urban areas, like myself, try and find anything decent under 350k, and even then you are into a 500 sq ft studio, which doesn’t work well for most people. So while I agree that lending practices need to be tightened and people should have to save for a down payment, 20% in some areas is not realistic, even with the higher incomes in these areas. Currently they are requiring between 3-10% down and a minimum of two months worth of payments in savings, which isn’t what I would feel comfortable being leftover, but why is it a good thing for people in these areas to have to save for 15 years to afford a 20% down payment and then get into a 30 year mortgage. This has most poeple paying a mortgage into their retirement years. The object it allow people to get what they can realistically afford, not make home ownership out of reach for most.

  4. Geoff Says:
    November 21st, 2008 at 7:54 am

    Although I always planned on putting 20% down, it’s frustrating living in a high cost area. It almost becomes a choice between having kids or buying a house, or just waiting a long time for both which has its negative side.

  5. Eric Says:
    November 21st, 2008 at 7:56 am

    agreed, it’s a good thing

  6. savvy Says:
    November 21st, 2008 at 8:09 am

    I think what a lot of people fail to realize is that housing prices skyrocketed, in part, because people weren’t required to put 20% down anymore. When I lived in the Bay Area in the late 90s/early 2000s, there were bidding wars and houses regularly sold for $100K MORE than the asking price. There would have been far less bidding wars if people were expected to come up with an additional $20K.

    People don’t care as much about the purchase price when they don’t have any skin in the game (all those 100% loans). It’s similar to how kids don’t care how much toys costs when it’s mommy and daddy’s money. As soon as they have to start using their allowance, they realize they can’t afford everything they want.

  7. philip Says:
    November 21st, 2008 at 8:56 am

    It would probably be best, but it is also still the opposite of what every bit of legislation is pushing for. The $7500 first time home buyers credit comes to mind as a way they are trying to get more people buying.

    I also know that I did not do as much of the saving thing as I should have, and I have zero problems paying, but it would have likely been better to hold off and save up some more before purchasing.

  8. Lindsay Says:
    November 21st, 2008 at 9:33 am

    I’d like to give you an example of how we bought our first home. We didn’t have 20%, or even 5% to put down, so we went through a city program that allowed us to lease the house for two years while saving up the money to put down. It was a “first-time homeownership program” that the city was really pushing, so more people could enjoy the “American Dream” of owning a home.

    As a result, we were required to go to all of these financial and homeownership classes, and there were a bunch of other regulations that we had to follow as well. They basically controlled everything to do with that house for two years!

    While I’m thankful that we were able to purchase that house, looking back it is obvious that we could not afford the house! So why were we so anxious to get into it? We needed “more space”. And why was the city so anxious for us to by it? They got to control where we lived, and how we lived while we were under their “care”.

    I’d like to point out that THIS is why the government wants to bail out all of these companies, and why they want to have such a hand in giving people things they really can’t afford. The more people they give money to, the more people they can regulate.

    I do want to say that there are some very caring and concerned people who truly desire to help people, and we met many of those people. I appreciate and thank God for them, because I loved our house. But I think ultimately, the program is designed to put people in homes that they can’t really afford, and many of those people aren’t even ready for the responsibility of owning a home.

    Sorry for the long comment – that’s a really long way of saying I agree with you, and whatever the market does (on it’s own) is sure to be the best in the long run.

  9. Jaynee Says:
    November 21st, 2008 at 12:11 pm

    When we bought our first house in 2001 we put down 5% as well. Fortunately, when we sold five years later the house had appreciated so much that we were able to put a 30% downpayment on the new house. Our plan is to be in this house for another 4-5 years, and we’re happy that home values have been steady in the past two years – no loss of value whatsoever. If we continue to pay the principal down AND gain 2-3% appreciation in 4-5 years, then with any luck we’ll be able to have 35-40% equity in the home we intend to build at that time. THAT would be wonderful.

  10. Stacey Says:
    November 21st, 2008 at 1:12 pm

    We put 10% down on our first home (cost $160K); 20% on the current one (cost much, much more!) I detest paying PMI, so we got out of it as soon as the appraised value warranted on the first one.

    Yes, we need to become more prudent as a nation, however I see nothing wrong w/10% down. If/when home prices resume increasing in value a buyer can petition out of the PMI as we did. It would help move some of the housing inventory and give buyers some tax writeoff, depending on their circumstances. Plus, moving multiple times is no fun, so if one can start putting down some roots, all the better for the community!

  11. LegalTherapy Says:
    November 21st, 2008 at 3:04 pm

    My wife and I bought a co-op and the board required that we put down 25% – far stricter than what our lender required. Not a bad idea…

  12. My Journey Says:
    November 21st, 2008 at 3:48 pm

    In My Humble Opinion this discussion should be nothing more than a business decision BY THE LENDING BANK.

    If I am making $200K a year (I am not!) but have yet to save up the 20% it should be no one’s decision (except the lending bank) to lend or not to lend me th emoney.

    Most people are quick to pass some regulation rather than let the markets work themselves out.

  13. TheMightyQuinn Says:
    November 21st, 2008 at 5:20 pm

    If 20% is a good idea, what about 50%? How much would houses cost if you had to pay 100% up front? Would that be a bad thing?

  14. Oscar Thibidoux Says:
    November 21st, 2008 at 5:46 pm

    The no or low money down and creative financing have been a major factor in the economic meltdown. Somehow we need to have a program to help deserving homebuyers without allowing a bubble to re-occur.

  15. Ken Says:
    November 21st, 2008 at 6:20 pm

    Since tax dollars will always be used to BAILOUT the bankers mistakes, whether it’s S&L in the 80’s or subprime loans in 00’s, there should always be strict regulation, including 20% down.

    When will these bankers ever get it right?

    The free market believers sure have a lot of faith in the investment bankers. I’m not so anxious to help them out in their “make a quick buck” attempts that come around every other decade.

  16. Russ Says:
    November 21st, 2008 at 8:05 pm

    Down payments are required because they protect the bank, not the consumer. Our present situation was not necessarily caused by low down payments, but low down payments in combination with low credit, low incomes, with a heaping dose of speculation and fraud. Banks forgot about risk layering…

    The problem with the market now is that prices reflect that people could get great financing terms. However, now they cannot so the prices have to fall. If we want the housing market to stablize, banks have got to make COMMON SENSE loans. They went too far with the sub prime, but there is no reason to deny folks making great incomes with good credit and reserves mortgage because they banks arbitrarily want 20% down now when this group of borrowers didn’t cause this mess in the first place.

  17. Mike Says:
    November 21st, 2008 at 8:11 pm

    My wife and I lived in an apartment that was fairly easy to afford, budgeted our money carefully, and put as much as possible towards the house savings (while simultaneously saving for her to get her masters and retirement)

    Now, about 2 1/2 years later, we are buying a new house (closing next week!) with /over/ 20% down. We want to make sure we can afford the place, since it is where we intend to start our family, so we didn’t want to play any games about “well, we may be able to afford…” – so as far as I’m concerned, the faster we own the house and the less we pay in interest, the better!

  18. KC Says:
    November 21st, 2008 at 8:22 pm

    I’ve been researching mortgages since I’m moving in a month and I assumed I’d be putting 20% down. However my husband and I were approved up to 97% of the loan from SunTrust (our current bank). But anything over an 80% loan would involves PMI and a higher interest rate. I called around to a few other banks and this seemed to be the norm. This is for someone with very little debt (a reasonable mortgage) and very good credit.

    However, I called Bank of America and they told me they still offer a “Physician’s mortgage” where they will loan a physician or resident 100% (no down payment) and no PMI, with a 1% origination fee. Without the origination fee the interest rate would be about 0.5% higher. This afternoon the rate on a 30 yr fixed was 5.75%. Of course to qualify you’d have to be a physician or resident. We qualify so we’re all over this loan, but we’re still getting the home we’d intended to buy when we thought we had to put 20% down. Just cause we now don’t have to put anything down doesn’t mean we’ll increase the amount of home to buy.

  19. shadox Says:
    November 21st, 2008 at 9:18 pm

    How about a 20% down payment on a house in the San Francisco Bay Area? This will get you a 3 bedroom house in a decent neighborhood. The house won’t be a pretty one though – probably 30 or 40 years old and requiring some work…

    I think demand is not going to be very strong… prepare for further house price declines.

  20. Preston Says:
    November 22nd, 2008 at 12:05 am

    my wife and I did a single 100% loan for 285k without PMI 30 yr fixed at 6.625. I found a wonderful neighborhood 2 miles away from work that I lived in next door to my best friend and his family. We were going to save for a home, but when this specific home became available we wanted to jump immediately because it is 7/8 acre, which is very rare here in suburbia – much of the houses built after the 60’s are on 1/10th acre!

    I’m grateful we’re responsible and able to make our payments on time, as well as live debt free and have put money into the home (it needed some work and still does). I spoke with my original realtor and he said if there were comps in the area he could compare, based on what my loan officer said I could refi and have nearly 90k in equity after putting 30k in and suffering all the losses. Problem is, there are no comps that come close in my area for size of lot or house style.

    Still, we plan on staying, so the original loan isn’t bad. But over the long term, the refi i mentioned could save an additional 100k or so, on top of the 100k or so I’ll already save if I pay 1 extra payment a year.

    Funny how that works.

    Sorry – that was all off topic. At any rate – 20% down isn’t a bad concept, but it shouldn’t be a blanket rule. It should be the standard, then up to the bank to decide if it a person is worthy of alternate terms. That said, said banks that agree to these non-standard loans deserve to burn in hell when their greed gets out of control.

  21. Kitty Says:
    November 22nd, 2008 at 6:49 pm

    For once I agree with Preston that 20% is good, but it shouldn’t be a blanket rule. There are other criteria – one’s income, assets, credit, other debts, etc., ability to afford the payments, etc.

    “I think what a lot of people fail to realize is that housing prices skyrocketed, in part, because people weren’t required to put 20% down anymore. ”

    People weren’t required to put 20% down in the past either. The very first property I bought was in late 80s; the second in early 90s (job transfer) and my current one in late 90s. So I have personal experience with what was required or not required in the past.

    Yes “creative” lending practices lead to this bubble, but it wasn’t just the downpayment. The main change between recent and not-so-recent past was the removal of any kind of checks that one could actually afford the payments as well as any kind of actual income verification. Before the secutirization of mortgages banks actually cared if you could afford the mortgage. Also in the past, we didn’t have 80/20 situations. In fact, banks tried to verify that whatever downpayment you give them was not borrowed.

    But 5% down mortgages were pretty common in the past too. The first condo I got in late 80s was with 5% down. The amount itself was only about 1.5 times my yearly gross, so I could easily afford the payments. In fact, buying this place made sense to me financially: with tax deduction it was cheaper for me to own this condo than to pay the rent on a similar apartment (one bedroom). So by buying even with 5% down I saved money every month.

    I don’t remember if I had 20% at the time – it was 5 or 6 years after I started working and I had some savings, but I lost a large percentage of what I had in 87 crash. I think I could’ve raised 20% if I were to sell my stocks at the bottom, but I chose not to. This worked out fine for me. I sold with a small loss after I transferred to another branch of my employer, but I had funds to cover it.

    For my new place and the one I bought after that I gave over 20%. But by that time I had more money saved.

    Even in the “good old days” 20% down wasn’t the requirement. There were 5% down mortgages in the past. But in the past the banks actually looked if you could afford to pay it. The allowed percentage of you gross you’d pay for housing was higher if you were giving 20% down, i.e. with 20% down you could take a slightly higher mortgage. They also took your whole financial situation into consideration – income, income stability, savings, other debts. The banks also checked that you actually had the money for your downpayment and not just borrowed it from another bank or anybody else — you had to send in bank statements to prove that money for your downpayment were there before. At least in my experience.

    Yes, 20% is a good idea – why waste money on a PMI? But it’s possible to only give 5% down, but still be OK. Banks just need to look at each situation individually.

  22. Slinky Says:
    November 24th, 2008 at 12:45 pm

    I’ve always planned on putting at least 20% down on a house when I buy. My fiancee and I are planning to be debt free, pay for our own very nice wedding and buy a house with 20+% down within five years.

    And it’s not like we’re scraping the barrel to get it done either. We still have fun and buy things and go out with friends. We’re just not stupid with our money. We don’t impulse shop and we keep our regular expenses down. I’d rather have a house than a new sweater every other day, you know?

  23. poor boomer Says:
    November 24th, 2008 at 11:52 pm

    Another reason for tiny houses.

  24. Eric Says:
    March 29th, 2009 at 4:41 pm

    My opinion is that requiring 20% down is harsh for those who meet the other criteria of a good buyer.
    My fiance and I are in the market for a home of our own. I saved a lot, but not 20% in the South Florida market. We fell in love with a home that was only 163k. We have a credit score over 750, steady employment, and are quite comfortable with paying 10% down, and the monthly payments. Since they stopped lending unless you have 20% down in South Florida, we won’t get our dream home. Thank you to all those to helped screw up the system so that an honest couple gets denied because we don’t have 40k in our back pockets. All anger aside, if anyone knows of any programs to help other than FHA please let me know. edb05c@fsu.edu

  25. sean Says:
    May 24th, 2009 at 4:51 am

    Hi, I dont believe in 20% down atleast 5%, I am buying a short sale for 136k woth 225k when i putt some tlc few bucks into it. However I have gone through HELL to get a loan with PMI i have income high credit etc. But mort insurance denied me. i was approved through HSBC 4.75 apr worst customer experience ever. they have best rates worst service my lawyer said I made a hugh mistake with them. Its beeen 3.5 weeks since i was suppose to close my LO answered 1 call when i used a friends phone. I stand to make over 80K equity. I now have to put 20% down luckily my parents where kind enough to lend me 15 k i was short no pmi saves me 100 mo plus 60 off payments, my mort is 800 with prop tax in NJ great deal, but Bank of america offered me 15% down no pmi no closing costs, meaning 12% down 3% closing, I turned it down because they told me 10% and changed it due to conditions, little did i know i ended up puttung 8% more down inc CC. HSBC will lie cheat and string you along, stay away unless FHA my home needs work wont qualify.Because you get a low int rate you get no service and people who cant handle the volume your loan gets thrown around and it upto you to chase it. Happy Im closing in a week but lost all excitement ill believe it when i sign! That how much trust I have in them even with 20% down……the B.A deal is for u eric go with it only 15% down no pmi no closing cost its a steal… trust I know people close to me who used them great expiernce and they Guarantee a 30 day close after approval…

  26. ME AND YOU Says:
    May 24th, 2009 at 5:05 am

    HSBC STAY AWAY ALERT….WASTE OF TIME FOR CONVENTIONAL…..THEY WILL ONLY HIT YOU FOR 20% DOWN TRUST ME I HAD ALL DOCUMENTS PLENTY OF INCOME LOW DTI RATIO MONEY IN BANK FOR 5.5% DOWN AND 6 MO LIVING EXPENSES PLUS 11K COMING IN TAXES. THEY SENT COMMITMENT LETTER, AND SENT ME AN EMAIL I WAS APPROVED FOR MI INSURANCE CLOSING DAY THEY WERE NO WHERE T BE FOUND, SAID THEY NEEDED 2 MORE DAY, THEN 2 MORE, THEN A HEART ATTACK FROM EVERYONE INVOLVED, THEN 1 MORE WEEK, THEN MAYBE 2 MORE WEEKS, THEN NOTHING THEN NO WE CANT DO IT UNLESS YOU GIVE US 20% DOWN… WE ONLY HAVE 1 PLACE MGIC THAT OFFERS MI INS AND THEY SAID DENIED DUE TO YOUR GIRLFRIENDS ID BEING UPDATED TO HER ADDRESS RECENTLY B.S. ITS A CRISIS WITH MI INSURANCE THEY LOST TO MUCH $$$ BUT HSBC DIDNT HAVE TO DRAG IT OUT I ALMOST LOST HOME SEVERAL TIMES WAITING SINCE BANK IS SELLING IT.GO FHA OR NO MI LOAN OR YOUR WASTING YOUR TIME,

    BEST YET 20% DOWN HOLLA IF YOU CAN RELATE, DOSE ANY ONE HAVE PROBLEM WITH HSBC TOO?????????

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