What's a decent down payment?
In one of the many stories that I read yesterday about the Freddie Mac and Fannie Mae takeover I came upon one comment that really stuck with me.
The story, by Associated Press reporter Tom Raum, delves into some of the risks the takeover poses to taxpayers. At the end of the story, he quotes Peter Morici, an economist and University of Maryland business professor, who sees the potential for “political chaos” if the folks in Washington can’t compromise on how Freddie and Fannie should be organized in the future.
“They have to go back to what they were before -- but adequately capitalized -- and politically independent,” Morici said of the two mortgage giants. “And Americans are going to have to be introduced to a ‘new’ concept: saving for your down payment as opposed to borrowing for it.”
It’s the last part of his comment that struck me because so many people purchased property during the real estate boom with little or no money down. Some literally financed 100%. (National Association of Realtors statistics indicate about 45% of first-time buyers went with no-money-down sales before the mortgage meltdown began last year, according to news reports.) I know this allowed many people to become homeowners, and not all of them have become foreclosure statistics. But I am financially conservative, and I had always been told it’s best to have a 20% down payment, plus a little left in the bank to cover unexpected expenses. So 100% financing just sounds crazy to me.
Still I’m torn about down payments of between 3-5% that helped some people buy homes for their families. For many people, a 20% down payment would be difficult to raise quickly, but that doesn’t mean they couldn’t manage monthly mortgage payments.
I'd be interested to hear what others think is reasonable in the current environment. Should lenders require borrowers to have a 20% down payment, without exception? Is it too risky to let buyers purchase a home with a down payment of less than 10%? Or would such a policy exclude too many people from home ownership?
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