What's a decent down payment?

Very tough question. My opinion is 10%. The main goal is to allow people home ownership who can afford the monthly payment. This only benefits the homeowners, the neighborhhod, the town etc. What the investors (banks/Fannie/Freddie) do is calculate the risk of property values rising or declining in order to set guidelines with acceptable down payments.

In the past home prices were 3x family median incomes making it easier to come up with the 20% down payment. With inflation rising and home prices soaring the last 15 years family median income has lagged far behind the median home price, making it harder to come up with the 20%. Is 100% financing acceptable? As a standard lending practice no, but the investors need to come up with the acceptable down payment. As the past few years indicate they have not .

I think the old standard of 10 percent is good. That may demonstrate an ability to save and budget, at least.

Very tough question. My opinion is 10%. The main goal is to allow people home ownership who can afford the monthly payment. This only benefits the homeowners, the neighborhhod, the town etc. What the investors (banks/Fannie/Freddie) do is calculate the risk of property values rising or declining in order to set guidelines with acceptable down payments.

In the past home prices were 3x family median incomes making it easier to come up with the 20% down payment. With inflation rising and home prices soaring the last 15 years family median income has lagged far behind the median home price, making it harder to come up with the 20%. Is 100% financing acceptable? As a standard lending practice no, but the investors need to come up with the acceptable down payment. As the past few years indicate they have not .

20% down payments might be good because they put americans back into the habit of saving again. As a country, our savings rate is abysmally low, probably because we have realized we really don't need to save - anything is available on credit.

Being reminded that saving is a good thing would be itself a good thing.

As an aside, I note the NAR home sales numbers dropped, both Year over Year and Month over Month, but it seems to be getting ignored...

20% down payment is a ridiculous amount in this part of the country, imo. On a 400k house - which is pretty typical for a nice starter home around the 95 beltway, that's 80k. Trying to save up 80k while paying Boston rents. Almost impossible for most people. 5% to 10% is probably a much better requirement in this state.

I think you are absolutely right about the 20% down payment. It should have been a requirement to get any loans. The point is buy what you can afford. If you cannot afford the 20% down, you cannot afford that house. If all the people are doing this, the housing price will be much lower and there will be much fewer foreclosures.

We are a couple each making about $50,000 per year and each 1-2 years out of college. We have $90,000 in combined student loan debt and thanks to my girlfriend's family had about $40,000 in cash plus another $15k or so in retirement accounts.

We just bought a foreclosure for $270,000 through an FHA program that included rehab funds. We put 3% down and built in another 3% to the sales price to cover (we thought) closing costs, so this was in essence a 100% financed home, even though it required us to come out of pocket about $8000 for the down payment.

We had a fair amount of money left as a cushion, which is good, because the closing costs on the loan turned out to be another 2% (about $5400), partially because of a very high lump sum for PMI since we didn't have 20% down. So now we're in for 5%, or about $13,000, plus the various costs for things like inspectors that weren't counted as part of our closing costs.

We have between us an above average household income and bought a house that in the greater Boston market should be considered a steal. We have a VERY typical amount of college debt, financed at low interest rates over 20+ years for about a $600 monthly payment. We live with one fuel-efficient car (paid for) and except for too many meals out, we try to live below our means. We pay down our debt beyond the minimum payments whenever we can and save in excess of 15% of our combined monthly income in pretax retirement accounts. In other words, we're a pretty good credit risk, and we're probably not the typical American family. We're really trying to be smart about this--that's one reason why we bought a foreclosure that needs work.

Having said all of that, how on earth would we ever have been able to come up with 20% down plus closing costs of 5% plus a cushion for the extras for this place, even with the 15% we're saving and the $40,000 we were lucky enough to have given to us by her family? To live up to the standards Morici wants us to return to, that would have required us to have roughly 30% of the home value in the bank (20% down, 5% closing costs, 5% reserves), or roughly $81,000. Even with the initial $40k in the bank, that would mean raising another $41,000. We're saving 15% a month, so that would take about 3 years. If we didn't have that initial $40k, it would take more than 5 years to save that amount of money. But note that the money is being saved in our retirement accounts, which we really shouldn't be emptying out to fund a house purchase, so in reality we would have to wait even longer to have a comfortable cusion.

All this points to a couple of key observations:

1--the student debt we're asking grads to carry is starting to seriously impair their ability to do things like buy a home. People like Morici didn't have to carry that debt when they were saving up their 20% down. Lenders and economists are going to have to rethink their positions on down payments given the reality that almost EVERY person entering the homebuying market over the last decade has started out with what amounts to a second mortgage tied around their neck like an anchor.

2--Although a sizable chunk of young homebuyers are lucky enough to have family help (like us), it's by no means the majority. Returning down payments to 20% would effectively drive an (even bigger) wedge between the haves and the have-nots.

3--If banks want to see 20% down payments become the norm again, home prices are going to have to come a LOT farther down. If we want to go back to 20% down payments, we need to go back to home prices that have a similar ratio to income as they did before low-down payment loans. In other words, 2-3X income. And since young earners will still have that college debt that's often 1x income, that's more like 1-2x income left for the house purchase price. With a median household income in Boston, that means we will need to see a lot of homes in the $80-$160k range. Even after a rash of foreclosures and even looking in the worst neighborhoods, that's not the case, and those houses that are creeping towards that price point tend to need an equal amount of money in repairs.

So yes--a policy of 20% down, or even 10% down, would exclude far too many people from home ownership AT CURRENT PRICES. Unless you want to see another 50+% decline in market prices, be careful what you wish for.

"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. "

First time home buyers would be helped more if prices were moderate than any scheme to lower their down payment/interest rate/monthly payment. All these things eventually just lead to a price bubble, which forces more concessions to let ordinary families into the market and eventually you've got to let them buy with interest only ARMs and no money down. What's wrong with setting responsible criteria and letting the market determine what that means for prices? Down payment should be at least 10%, probably 20%.

If you want to see prices free-fall, even here in Boston, offer 0-5% down loans for years, then suddenly require a 20% down payment for everyone. That's the way to guarantee it. I doubt they will do that. Any wild changes in the ability to purchase a home would be disastrous.

People are pointing out that 20% of boston prices is too much to save.

But maybe that means not that 20% is wrong, but that Boston prices are too high?

Moving to 20% will certainly bring them down!

As someone who managed to save 20% for a downpayment (alone) I know it's doable. I had to make sacrifices, but they were worthwhile and they paid off. Now I feel comfortable that I can make my mortgage payments and if I unfortunately have to sell, I won't be completely screwed.

However, I think that under very specific circumstances, that a 10% downpayment would be acceptable. Saving 10% still shows that you are able to budget and save, and you would be somewhat insulated if you had to resell quickly. But the people making that downpayment really need to demonstrate that they are financially fit to handle their mortgage. Less than 10% downpayment, you are at too high of a risk to be upside down on the house, and are not guaranteed to be able to sell for more than you owe.

A side note - during the insanity years, mortgage brokers would literally chase me down and try to convince me to buy a house. I would always reply that I didn't have enough money for a downpayment, and I couldn't afford a mortgage as I had been paying off student loans and such. Their response would invariably be "That's OK. You don't need any money down. Call me and we'll get you a house." I knew that there was something seriously wrong with the industry when, even though I TOLD them that I couldn't afford a house they still tried to pressure me to get a mortgage. Buyers should be proving to the banks that they CAN afford a house, not the other way around.

20% should be minimum. If you don't have money, you should not buy a
house. RE price will also go down to a reasonable level.

10% Minimum... 3 -5% is just too low and can easily be wiped out in this housing MKT. But then again who in their right mind as a 1st time homebuyer would buy right now? If you have worked hard and been disciplined enough to actually have 40k in cash why would you risk it to buy now when housing could and should come down another 10% in this area?
People say 3 times family income... 2 earners no kids make $115k/yr 27 years old... $345,000 home. We are renting because we want to have kids in 2 years and why not rent a 2 bedroom apt in Natick for $1,300 including heat. Live off of one income have a mom at home to raise the child versus $2,600 Mortgage and Taxes and $1,500/month in childcare and alot of stress? We know what we are choosing to do.

As someone who put 5% down (twice!) I must say I see nothing wrong with that number, as long as 1) the other borrower fundamentals (income, assets, credit score) make sense, and 2) it's not a flip or investment.

If the borrower has a clean history, can afford the monthly PITI without really stretching, and is planning to live there awhile, then from the bank's perspective it seems a fairly safe bet to me.

From the borrowers perspective there are a couple of good reasons to want to do this. As someone pointed out it's a long slog saving 20% around here, given housing prices. I can already imagine the posts howling about my poor attitude toward saving, but if you're buying a $400K house and have saved $30,000 ($20 for down payment+$10 for emergencies, repairs, improvements, etc) that's a significant amount. Almost anywhere else in the country that would be your 20% right there.

And the less of your money that goes into the down payment, the more you have for emergencies, repairs, improvements, etc. And the sooner you're in, the sooner you're paying off a mortgage instead of paying rent.

There might - might - be a problem if housing prices drop as they are now within a few years after the purchase and the borrower is underwater. But again, if the borrower isn't worried about making payments and are planning to LIVE there for a minimum of ten years or so, then no problem.

Ok, I'm sure I missed some obvious reason why this is crazy. I await the howls.

I agree with the idea no more than 10% for Boston housing or any big city housing.

Even if a couple makes $100K a year or slightly more, a 2 bedroom condo or even a single family home in lower-incomes areas runs $300-350K. Then add to the fact that today's twentysomethings and thirtysomethings have to pay student loans, high childcare costs, etc. And rents are rising, food prices are rising, energy prices are rising---those affect homeowners too, but they hopefully bought before the bubble and have lower home payments.

Rent for a decent, non dilapidated two bedroom apt. runs something like $1500-2000 depending on the neighborhood...maybe more if its a really nice place, and maybe less if you have a connection, etc.

Saving up $70K in the next few years, even if you cut out luxuries, eating out, vacations, etc. is not going to happen once the kiddies start arriving, college bills are due, etc.

I also think that closing fees need to be seriously examined and regulated too. Ridiculous to pay a downpayment and then sometimes up to $10K or more in closing fees and have to quibble over these with the bank.

I believe that 20% should still be the standard. Owning a home requires a lot of fiscal responsibility, and the process of saving 20% is a HUGE lesson in fiscal responsibility. A 20% downpayment (that you have saved, NOT a gift) shows the bank that you can be trusted with money, and therefore they should loan you the other 80%.

And 20% should be the standard regardless of what home prices are. If home prices are high, yes the downpayment will be higher, but so will the mortgage payment. If you can't scrape up a downpayment while paying Boston rents, how on earth are you going to make the mortgage payment and handle the maintenance costs of owning a home (ooops, there goes the hot water heater!)?

$80k may seem like a huge amount of money, but someone who earns enough to make the mortgage payment on a $400k house should be able to save that over the course of a few years. Owning a house is an earned privilege, NOT a right.

this is the reason why this country is in this financial tsumani ! 30% should be the magic downpayment;do what eveybody use to do;SAVE, buy a small home than move up;the problem is eveybody wants to start with a 400,000 home

I think you're missing the point, Justin. 20% isn't the problem, it's the house prices. Higher down payment requirements would necessarily lead to lower prices. Lowering down payments to give people a "break" has an extremely well-documented effect of increasing mortgage defaults. Which is how we got into this mess.

Down payments: make 10% mandatory for all types of home loans.- Anyone with me???

10% down payment is a reasonable amount. Banks should encourage savings by offering a better rate on a regular savings account. In 1990 the banks gave 5% on a regular savings account. After the banks mess of the early 90's that rate dropped to about 1/2% and the banks made tons of money.

The banks should also require that the underwriting of all debt include health insurance

I believe a down payment amount should be based on each individual situation, dependent upon different criteria, ie, credit worthiness of the individual(s); history/management of home ownership; purchase price vs. value of the property, etc. Someone who has excellent credit, a history of managing their finances in a manner consistent with their means, and is interested in purchasing a property at a price well below the appraised value should be able to finance 100% of the price if so desired. As opposed to someone who is high risk, buying a home at or above the appraised value, would require a higher percentage down. The down payment amount should be flexible.

I think 10% is good. However, a lender might accept a bit less if the borrower can PROVE he/she has a steady source of income and a good credit rating. That is, a good record of paying bills on time for some extended period.

here is what I find funny when people argue for low down payment...

Post #15: "a 2 bedroom condo or even a single family home in lower-incomes areas runs $300-350K"... "two bedroom apt. runs something like $1500-2000 "... "Saving up $70K in the next few years, even if you cut out luxuries, eating out, vacations, etc. is not going to happen once the kiddies start arriving, college bills are due, etc."

ok, compare the two... buying $325k place and financing all of it will cost you about 2k a month for principal and interest, about another 200 for taxes, 50 for insurance, 150 for maintenance, 150 for PMI... so let's say, best case $2500/ a month for a house THAT WILL NEED A LOT OF WORK. So apples to apples, without cutting anything you would be able to save $500-$1000 a month. that means it will take you 5 to 10 years to make 70k, now cut some luxuries and you will be albe to save that in 4-8 years.... (one weeks vacation for 2 and eating out once or twice a month probably costs $3k a year)

not that unreasonable...

My husband and I are in our early 30's. We both took loans out for school, we paid for our own wedding, have no help from family etc. We rented for years but with a 100% financed loan we were able to purchase a modest home north of Boston - during the time when any real estate was in high demand and there were bdding wars being won and lost It's 5 years later, we are now raising 2 kids in thay 100% percent financed home, we pay for daycare, we have 0 credit card debt, 0 student loans, max out retirement and have a great savings.

When we move to the next home it will with 5% down and we will be just as responsible!

20% percent would have been 60k plus for us - not easy to save up front when you are starting your career, paying out 1000k/mo in student loans, renting etc.
I

Yes, 20% should be required. Yes, at the current prices, very few people can come up with a 20% down payment.. The result, currently overpriced homes will quickly return to fair and reasonable prices. Prior to this mortgage crisis, I was amazed at all the people buying homes at ridiculous prices with no down payments, adjustable rates, and often interest-only mortgages.. Now, the government is bailing out reckless homeowners, while I still feel homes are too expensive. Rather than helping reckless and irresponsible homeowners, thus encouraging escalating prices, banks and government should be encouraging saving and responsibility, which they have failed to do. Requiring 20% down would force Americans to save and take some financial responsibility..

As a singleton I bought my home with 20% down and the mortgage people wanted to give me more money. Heck they laughed when I said I had 20% down. I am laughing now because I got a fixed rate, there was no where for the rates to go but up, and I am not upside down on my mortgage.

It can be done and I worked very hard to come by that money, and right now I am pissed at the people (both borrowers and lenders) that have played a huge hand in the crisis, now I am ready to move on but I cannot sell my place. I don't expect to do anything but sell it for a loss, however there is such a thing as an acceptable loss and one that is not. So I am waiting for an acceptable loss.

20% is ideal and that is the goal that everyone should work for, and then depending on the environment 10% maybe more realistic. Anything less that than is taking a huge gamble. Not everyone is ready to be a home owner just because someone is willing to give them money.

Perhaps there isn't just one right down payment ?

For people who are trying to buy a home that is at the upper limit of their estimated ability to pay, a down payment of 20% might assure the lender that the borrower is willing to assume a greater share of the risk.

For those who buy at the lower end of the threshold, then maybe 5% is fine, since the lender assumes less risk in the borrower being able to make their monthly payments.

In between might be in the 10 - 15% range.

This might encourage first-time buyers to "start low" rather than trying to buy their dream home right up front. Would work well for those who have equity from the sale of a home, since they usually have the ability to make greater down payments on the next home and also have a motgage-payment history that can be reviewed.

Where is the proof that requiring a higher down payment will result in lower prices? I understand the theory of a reduced pool of buyers should lead to price competition, but isn't that what we are (supposedly) experiencing right now? Yes prices have fallen, but where is the precipitous drop to meet the reduced pool of buyers? Perhaps the focus should be less on down payment and more on loan product? And yes, home ownership is a privilege, but there are myriad social and economic reasons to encourage and support this "privilege" -- esp. among the younger, college educationed generations.

I agree with Jason.

My wife and I are 27 make about 115k and are renting because we have Student Loans of 38k combined that we have been paying off for 5 years now. You can rent a 2 bedroom apartment in Natick for $1300/mo with heat... Why would we buy a 350k home where our monthly payments would be $2,600 plus heat and utilities that would push it over $3,000 easily a month to own a 3 bed 1 bath ranch... Housing is going to keep falling because my generation has so much in student loans and also realizes we need to save for retirement right now as well.
Most anywhere else in the country we would be able to buy a home right now... A comfortable purchase price for us making 115k would be 260k and we have $30k saved in cash so we could borrow 230k at 6%. Thats affordable. Too bad the avg home prices within 495 are about 75-100k higher than what would be deemed affordable for us. We will just wait till we find a great deal and a home we want to own.

Prices are too high. They are too high because of overly relaxed lending standards. Incomes do not support the current prices. In this environment - take out the availability of easy credit and the prices should start going down. Which is exactly what the market needs right now. Some action, some volume so people can go back to work finally (agents, brokers, banks, construction companies, lawyers etc.). Of course college grads are bitter (sorry Republicans, but I think it is true). How in the world are they going to be able to afford anything? A house should be a home, not an investment vehicle to make a quick buck. Make it 20% down payment. I am all for it.

If you have great credit, stable employment and the ability to afford the montly mortgage payments, why mandate a certain percentage down payment? The bank's are the ones who should be making the risk determination, not the goverment.

Also, further reduction in housing prices? That's a brilliant idea - that way all the equity millions of homeowners in the region built up through the years can be destroyed while a few thousand more people can by a house. Great idea.

hmmm.. this 20% standard sounds great for everyone who hasn't yet purchased, and HORRIBLE for everyone who already owns a home.

so the proposed "solution" to this problem of so many homeowners being underwater is to put in place regulations that will GUARANTEE that millions and millions more current home owners will subsequently go under when their equity evaporates overnight because 99% of the potential buyers just got wiped out in one fell swoop?? gotta love the paternalism in boston..

I think 10% is reasonable assuming that the borrower meet the income/asset requirements. After all, the point of the down payment is to protect the bank in case the borrower defaults on the loan. 10% should cover potential depreciation and cost of reselling the home (foreclosure, etc).
Making a 20% minimum only helps landlords as it would keep many credit worthy home buyers on the sidelines.

My husband and I have bought two houses since we were married. First in the NY/NJ Metro area, which we sold when we moved to Boston and bought here.

We put 20% down both times. We got better interest rates, better closing fees and no PMI by putting down 20%. And by the way, when we sold in NJ, we actually LOST $$ on the house, prices had dropped and we were lucky to sell it for the outstanding mortgage plus RE commission/closing fees. We had to save that 20% all over again for our Boston home.

Both times we were amazed that we were approved for more house than we thought we could afford. That is the real problem - mortgage companies that tell homebuyers they can afford 30-40% of their income as a mortgage payment. What about property taxes, or condo fees, or the leak in the roof. We made sure the monthly payment fit our budget - not their idea of what our budget was.

20% is a bit on the high side, especially for first time buyers who are not going to be able to realize profit on the house that they're selling, but 0-3% is too low. I don't know if the money down is the problem, it was that mortgage brokers, lenders and the whole system were not actually underwriting the borrower, just giving out money to buy property.

A potential borrower needs to have the income to afford the payments, and many of the loans made in the past 5 years absolutely ignored any sort of 28/36% rule. I knew people who got mortgages that were hardly employed, and even when they were, their payments were easily in excess of 50% of their pretax earnings, leaving them with hardly any cash flow once taxes and mortgages were taken out.

The different types of mortgages-interest only, exotic amm schedules, ARM's, etc-are the things that really screwed up the mortgage market as well. It pushed home prices up because people didn't look at the price of the loan that they were taking out, only the initial monthly payment, and thought that if the monthly price did go higher, they'd just refi and take money out and lower their payment because that's all that had happened since the last bust in the late 80's/early 90's. No one thought about the fact that they were taking out a $500k loan, only that they'd be paying $2800/month.

The student loan load also hurts many young people today as they come out of college. I know that everyone gripes about it, but spending hundreds of dollars per month on school loans does not allow young people to put the few hundred dollars away per month to put towards a down payment. I graduated with a huge debt load about a dozen years ago, and although I work in a higher than average income career, it took me a while to pay off school loans and put money towards a house.

There is also this mindset in the US that we all need to buy a house as soon as humanely possible, even if that means entering into stupid financing, or living house poor for our 20's. While renting may seem like throwing away money, when the market turns and you're upside down on your mortgage, which is 1.5-2x the monthly nut as renting an apartment, you soon realize that renting may not be a horrible idea. Most of our parents and grandparents did not own homes when they were 25 years old, and when they did, it was not the 4 bed 3500 sf house on an acre-it was a small starter.

However, after all of the above, I did buy my first property with a 20% down payment on a fully amortized 25 year mortgage. I had worked in finance long enough to know that it was just the more intelligent thing to do, and I had the cash to do so.

I think it depends on a variety of things. Mostly, it is a factor of the ability to pay and the market trend. 5% down for first time home buyers is not necessarily bad if they will be left with a set amount of savings and a realistic debt ratio.

Forget the 2X/3X salary to home price rule. Forget the 28/36 debt ratios banks have set today. If you have huge student loans, car loans, credit card debt, no cash savings after a down payment, barely enough income to cover monthly expense, the job market is shaky, and the housing market is busting, you have no business buying a house. Nor does a bank have any business giving you a loan to do so.

As for the high cost of homes in Boston, it is what it is. It will never be Iowa. Cities with good jobs and good schools will consistently have higher home prices regardless of what salaries are. Salaries eventually move to compensate to an extent. If companies want to recruit and maintain talent, companies have to pay.

Back to topic, as a rule of thumb 10% for first time home buyers. $40K for a down payment would take a little over 3 years to save for at $1000 per month. This is probably the same amount that would have to be spent on top of what rent may be costing for taxes, insurance, maintenance, and PMI. And, if you can save like that for 3 years, then you can assume you can afford the house without difficulty.

For second time home buyers minimum 20% and I'd say closer to 35%-40%. After all, we are talking about ownership, not renting. It is also assuming that you've stayed in the current home long enough to see some appreciation and have built up a more sound financial position during this time. I understand there are circumstances that would inhibit this 20% rule, but they should be considered as exceptions and not the rule.

If you don't put money into the purchase, you might as well keep renting since for all intents and purposes you are renting from the bank at that point. This dissuades people from buying on impulse and staying only a couple of years. After all, is this lease a house, or buy a house? If people are going to treat homes like a car lease, then maybe we need to look at financing that is somewhere between renting and leasing and is secured as such.

A 20% downpayment is too high for most Americans, given the significant increases in the cost of living and home prices in many areas of the country, including New England. I purchased my first home 3 years ago in a reasonably priced area with a 5% down payment. I have excellent credit and obtained traditional 30-year fixed financing at prime interest rates. I can afford my payments and will not be affected by the current decline in real estate values, unless I try to sell my place before the market rebounds. However, because I was careful, I can afford my home and have no plans to sell. The real problem is not the downpayment, but whether the underlying purchase was affordable. I firmly believe that many people are in trouble because they couldn't actually afford the home they bought. The amount of money they put down upfront isn't the reason they are in serious financial trouble.

I agree that suddenly requiring 20% down after years of accepting 0-5% will further tank the housing market. In a time of slow sales and an overstocked market, it's not a good idea to remove a huge segment of buyers from the equation.

As someone pointed out, new rules and new standards are required for this new real estate market. Thirty years ago when housing price to income ratios were lower and student loan debt was practically non-existant, 20% may have made sense. But we're in a new world- and new market- now. The percentage of income eaten up by school loans, health care costs, housing costs etc have skyrocketed. When those things chnage so radically, it's not out of line to expect other things to adjust accordingly- including down payments.

We have worked hard to save money- but my husband and I are looking at purchasing a house with 5% down. Why now? Well, prices will rebound at some point over the next year or two, so we don't want to miss out on the opportunities prevented to first-time home buyers in a soft market. Saving 20% would take another 3 years or so. At that point prices will probably have rebounded (or at least begun to) and we'll need even more to hit 20%. Instead, we chose to buy now with the knowledge that we can afford the PITI comfortably. Yes, it would be nice if we had 20% to put down, but as long as we can comfortably afford the payments- and we can- why throw that money away on rent and struggle to save up for another three years when we could spend those three years making an investment into our ownhome?

In other parts of the country, the same amount of money that gets you 5% down here would equal 10-20% down. If MA housing prices were in line with those across the country, maybe 10-20% would be reasonable. But that's not the case.

I wanted to add, that another way to look at people borrowing responsibly is to focus on the affordability of the PITI as opposed to the downpayment. As I said in an earlier post, we are looking to purchase a home for 5% down, however we are looking at purchasing a home that is well under what we have been approved for. Our income and credit scores approve us for a mortgage in the low $400k range, but we are looking at places to purchase for between $300-350k. We know what we can comfortably afford after taking into account our downpayment, interest rates and our other financial obligations. We should not be barred from the market because we can't come up with 20% right now.

Jason,

Your closing costs were outrageous. Of course I'm not 100% familiar with your situation, and maybe this special FHA program is expensive. I've never heard of anyone paying that much to close, especially when there are no closing cost loans available if you know where to look.

A big reason why we are in this mess is because you could buy a home with little or no down payment. That allowed people who had no hope of ever affording a home the ability to buy a home. Consequently it also creates a huge moral hazard since people are more likely to walk away.

It seems that what banks require for downpayment is up to them. And that depends on their risk estimates for a particular buyer.

This isn't about down payment, this is about Leverage. Where you pay 0% down, you get 100% leverage. Leverage used to given to homebuyers for free. Not anymore. Because the risk is being repriced and lenders cannot afford to give free leverage. Remember it's not just about borrowers, it's more driven by lenders now. Think ing if you run a bank, given more than $500 billion and possible more losses in the industry, would you give 10% down payment option to borrower when there is a high posiibility that the house market could go down further? Remember the borrowers can just go away if the house is worth less than the mortgage. The lender can't.

Good news is the financing cost is coming down after govt action of seizing Fannie and Freddie. 30Y fixed rate is down from 6.4% to 5.8% in less than 2 weeks.

However, 20% down rule won't change soon, Fed has cut rates, financing cost is coming down, but leverage just can't go up, otherwise we will see this crisis again very soon.

Bobby 41-I agree that there is the risk of someone walking away if they have no money into it, but a more thorough underwriting of individuals taking out the loans, making sure that there is income to cover the loans, a decent credit history, and not issuing loans like ARMs or I/O's to those who are not able to cover the loans if there's a rate reset or a need to refi from I/O to an amortizing loan based on a income analysis are a bigger reason why the market's a mess now.

Yes, there are some people who are so irresponsible that they're going to walk away from a mortgage just like they'd skip out on a restaurant bill, but that's the exception. Most people who are being foreclosed on simply made stupid errors in not understanding what they were doing, and the lenders not properly underwriting their loans.

If every lender required a 20% down payment, than home prices would drop accordingly. It's basic economics. Why some people on this board can't understand such a basic concept is beyond me. Larger down payment requirements hurt two groups of people:

1. People with no savings (these people should not be buying a home anyway)
2. Current home owners (due to plunging prices)

The same concept applies to interest rates. People love to argue that now is a great time to buy because interest rates are still low. So what? If interest rates shoot up to say 10%, it just means prices will collapse. A 1% rise in interest rates must be offset by a 10% decline in prices in order for mortgage costs to remain equivalent. Again, basic economics.

Our country wouldn't be dealing with the current mortgage crisis if all lending institutions required a 20% down payment and a mandatory 30 year fixed rate. If you can't afford to put 20% down, you are not ready for home ownership.

We recently moved out of Boston but would like to move back. We don't have the downpayment amount due to the daycare costs mentioned above. When we were in the Boston area we paid $1200 per month for a visibly run down place and now we are paying $1100 per month for a condo/townhouse. When you add $1500 a month in daycare costs, how are we supposed to save money for a downpayment? We don't have cable and we don't have DSL/Internet for the time being.

I am for mandating 20% down payment because housing in this country is a public matter. The government keeps interfering in it by means of tax breaks, fiddling with interest rates or bailing out banks and borrowers. Since the taxpayer/voter is the one footing the bill I say the taxpayer/voter should demand the stable housing market that does not go up or down 25% a year. And give me a break about people who "built equity." So far as I can see the equity in the last 8 years was built by a feeding frenzy on the part of the people who are now hell bent to keep the status quo.

On the other hand, if requiring a sizable down payment does not sit well with some people then people should bear the consequences of their investment decisions. That would be fine too. I say have at it. Go buy. But when the bubble bursts people should not be insulated from losses by the government.

I am just trying to understand the rules here. I have been saving hoping to buy a home for my family. Now the prices are too high thanks to smart investors. The prices are not going down thanks to the government. The interest rates are too low preventing my savings from growing, again thanks to the government. The inflation is eating into my savings and dollar is falling, again thanks to the government interfering in the workings of the invisible hand.

People seem to be very concerned about the wealth of home owners. What about the wealth of the savers?

One thing I don't think some people are getting at all is that the only thing requiring higher downpayments does is help banks recoup losses. Why should we LEGISLATE something like that?? I mean, if the banks don't care whether or not someone has any equity invested in a property to keep them from walking away, why should the government insist on it?

The only thing I think the government needs to look at is lending standards. If we want to insist on higher income to debt ratios, that would be something worth looking at. The notion that forcing people to pay more money upfront to the bank will somehow help the consumer doesn't hold water in my mind. I understand that it will marginally lower the loan amount, but it will also wipe out any savings people had in case of a foreclosure because people will be forced to divert savings from other areas of their portfolios in order to come up with these steep downpayments everyone is talking about. The banks would probably be stoked because their risk would be pretty much nil. The only people getting wiped out would be the borrowers themselves. That doesn't sound too good to me.

Can anyone explain why forcing people to lock all of their savings into a downpayment that can later be wiped out is a GOOD thing?

This is a no-brainer. 20% down should be mandatory. If you cannot save 20% of the home you want to buy, then you can't afford that home. Period. Squawk all you want about houses being "too expensive." I don't care, and neither should the banks. 20% is a rule of thumb because it is a significant investment by the buyer and also proves to the lender that the borrower is financially responsible enough to make this purchase. End of story.

Why don't we reconfigure how amortization schedules so that homebuyers and owners actually start paying down principal in a reasonable amount of time and don't have to count so much on a price increase to increase the equity in their homes? It would lead to a better ROI if one is forced to put down 20% on their homes. Currently, if you put down a large amount, your investment is purely at the hands of the market while you're paying monthly interest on the loan, and hardly touching principal, so when the price dips, which is completely out of your hands, it eats into your equity investment.

Current schedules don't really pay off any of the principal for about 5 years and even then it's minimal. Allowing for monthly mortgage payments to actually affect the principal balance on a loan would give homeowners a chance to use their money to pay off their loans rather than all interest.

to # 48 - because the taxpayer is expected to pay the bill. Take that out of the equation and will I agree with you.

When I bought my house, I put 20% down, but I could not do it now because housing is so expensive right now.

I know of many people who got married and had kids out of college. Most of those people had a very difficult time saving enough money to buy a house without any help from their parents (for those who had parents that could give them some money). Taking into account the amount of debt that people are carrying out of school. I think that 20% down payment now is almost of out reach for most people. So, I think 10% is fine considering the cost of housing right now.

As a comment to Jason, half of a newly graduated couple: Yes, tuition is ridiculously high, as are housing prices. Still, aren't you making the assumption that one or two years out of college you *should* be able to afford buying a house? Gen Y is buying homes earlier than previous generations.

I'm with JP--we bought in a risky market. It's entirely possible that our home will be worth less than we paid for it when we go to sell in 5 or 10 years. Why should we be the ones to take all the risk while the bank gets nothing but the gravy of an amortized loan where all the profit comes up front?

And I'm baffled by all the people who say that "If you can't save 20% of that home than you can't afford that home." Why not? What is so magic about the 20% number? What is more magic about 20% than 15% or 25%?

And yes, Bill, our closing costs WERE outrageous. It's a combo of the FHA rehab loan, which comes loaded with extra paperwork and fees, and the fact that banks are taking every opportunity now to soak the few people they will actually give a loan to--the pendulum has swung very far the other way and it's now almost impossible to get credit.

Sure, housing prices have been run up, but all of us have a vested interest in keeping them somewhat high--if we allow them to crash another 30-40%, which is what restricting the pool of buyers will do, then everyone who bought a house in the intervening time span, even and especially the folks who put large amounts down, will suffer. And as a consequence, the rest of us will suffer too.

Even is saving 20% of a home's value was possible for most MA first time home buyers (and it's not), how does tying the capital into the home help anyone? If banks are worried about the home buyer falling on hard times, have 100k in the savings is much more important than have 20% equity in the home. 100k in savings would cover the mortgage for what...3 years? Plenty of time for the home buyer to find a new job, home prices to appreciate enough the buyer can sell, etc.

If the new lending standards are going to being 20% down, I would suggest instead that the 20% go into an escrow account to be used in case the the buyer hits some turbulence. Otherwise, the buyer is just as screwed with 20% equity as 0% equity if they don't have any new cash flow.

People who bought within five years before the crash do not represent the entire population in this country. There are others here too. It is in the best interest of some of us to have prices come down and remain stable in the future to prevent economic calamities like we have right now. If it was between you and your bank it would have been a different matter. But it is not. We are all here held hostage. "We can't allow the equiies to diminish, we can't allow banks to fail, we can't allow Freddie and Fannie to go down", etc. Restricting the pool of buyers is necessary.

Renting is ok too. I have been renting for 12 years since I came to this country. I will buy when the numbers work. Rent is just much cheaper now.

I'm financially conservative at heart, but for a first-time homebuyer in an expensive area like this, 20% is just not reasonable. My husband and I had a good financial situation, but there's no way we could have raised 20% before we turned 30. So we put down 10% and looked for places we could comfortably afford (using *our* notions of comfort, not the the maximum the bank was willing to lend us). Now that we have above 20% equity in the place (and rates just went through the floor), we're refinancing. Bye-bye, 10% subprime loan.

I think people need to be sane, and they need to have a reasonable down payment -- if you can't stockpile some assets *before* you're making mortgage payments, what makes you think you'll be able to have an emergency fund or afford home repairs *after*? But I think there have to be some allowances for people, especially first-time homebuyers, in extremely expensive areas, assuming they have the income to justify the payments.

Someone's going to have to draw me a picture.

* I don't understand how raising the minimum to 20% leads to lower home prices;

* I don't understand how being unable to save 20% makes you unqualified to buy a home.

Seriously, what do you mean?

John K,

Simple. Requiring a 20% down payment eliminates a huge percentage of people from buying homes (because most people have very little savings). That greatly suppresses demand which greatly suppresses prices.

Down payments serve a few of basic functions:

1. They serve to prove the credit worthiness of the buyer. The buyer has to be fiscally responsible enough to save the down payment, which means they are probably fiscally responsible enough to pay the mortgage.

2. The buyer will have a vested financial interest in paying their mortgage because they have invested the down payment in the purchase.

3. The down payment serves as a buffer for the lender in the event of default on the mortgage and the need to sell the home in foreclosure.

So, when down payments were lowered/eliminated during the bubble:

1. Anyone with a pulse could buy a home.

2. A person can simply walk away from the home because the have no financial vested interest in the property.

3. Home prices were appreciating at 10-20% a year in many areas, so if a buyer did default, the home price appreciating would more than offset any losses to the lender.

Requiring a 20% down payment is in effect a contraction in credit as the buyer must finance a larger portion of the purchase while the lender finances a smaller portion.

And a contraction in credit is called deflation. Deflation in turn leads to lower prices.

Basic economics.

Our economy is a pyramid scheme. If we require the 20% down payments. Fewer houses will get bought. Fewer home sales mean less new home construction. Less home construction means towns' tax bases do not expand. Existing housing stock will also lose value due to the slowing sales.

Now, the government is bailing out reckless homeowners, while I still feel homes are too expensive. Rather than helping reckless and irresponsible homeowners, thus encouraging escalating prices, banks and government should be encouraging saving and responsibility, which they have failed to do.

It's funny how people get so indignant when the government bails out homeowners, but not when the same government bails out banks, mortgage lenders, airlines, or auto makers. The way I see it, we can pay now with a bailout, or pay later with arson and declining home values.

I'm one of the many renters who have been locked out of the housing market by spiraling prices. If mortgage lenders had kept requiring a 20% down payment, prices wouldn't be nearly as high as they are now. I have no problem with programs that provide down-payment funds to carefully-screened people who can't save one, usually after with finishing a class, but the standard should never have changed.

If no one can afford to put $70,000 down on a $350,000 house from that needs a new roof and furnace, the price will go down. If prices decline far enough, maybe a childless couple earning less than 6 figures will be able to afford a 2-bedroom house within 50 miles of Boston.

It appears that most folks will have to move to Indiana, Ohio or the south in order to own a house at 20% down. Please look around at real estate prices in Massachusetts communities that offer good schools, reasonable commutes and other amenities. Average prices start at $350,000 plus. If you are now paying rent, auto payments, some credit loans, insurance, IRA, etc., where does the $70,000 come from at 20% or even $35,000 at 10%. If you have children, good luck, the auto costs double along with health insurance. Is the median wage $100,000 for singles, $200,000 for couples?

A 20% down payment is not unreasonable. Yes, that's ridiculous at prices in this area, but I'd say that the prices around here are what need a serious correction. $400,000 for a starter home in the 95 beltway? What are people thinking? That's nearly half a million dollars. Part of what drove this price inflation is the low or non-existent downpayments and low interest rates (not to mention buyer hysteria). I agree with Peter Morici that Americans need to be introduced to a "new" concept of saving for a downpayment. Combine that with realistic interest rates instead of the ridiculously low ones that we see now and you'd quickly see prices around here also come back to earth real fast.

As for me, I own a home (no mortgage) and the only "benefit" that I've seen from this nonsense of the last 8 years is that my taxes have quadrupled due to over-valuation of my home and now I (or should I say my children) are going to pay dearly to subsidize those who were financially irresponsible and caused this mess to begin with.

Prices will only deflate so far. It costs a certain amount to build a house. My house cost @215000, and that was with my uncle building it on cost of goods and labor, no markup. That was 7-8 years ago. Lumber prices have skyrocketed since (if you don't believe me, compare the price of a sheet of plywood to 8 years ago).

In retrospect, I wish we had been forced into 10 or 20% saved, not given. My wife and I have been able to make it through even with a few boneheaded moves, but if I had lost my job we would have been in trouble financially.

A persons 20s should be about learning how to save, not buying a house.

ChiliPepr...

You have illustrated exactly why I am currently renting. You are correct that owning the same home right now WOULD be more expensive than renting and there is a huge difference. Frankly, my husband and I cannot afford $2500 a month with repairs with our other responsibilties such as saving for retirement, paying off student loans (undergrad and graduate), etc. I am in the exact same boat as Matt--$115K a year, 2 incomes, no kids. My husband and I have credit scores well into the 700s, little credit card debt, no car payments, $550 a month for student loans. We both save for retirement (not as much as we'd like) and contribute to a FSA.

Many seem to assume that saving money is simply a matter of not dining out and going on vacations. Which it just isn't. First, it has taken us 5 years out of college to be pulling in the incomes we now have. There aren't many professions, especially when we graduated in 2003, that allow you to earn $60-70K right out of college. We incurred some debt riding through difficult times, but have now paid that all off. Getting rid of our 7 year old car was another way we paired down--no need to worry about a $2K repair here or $500 repair there.

If you are 22 and you must go 4-8 years (the figure you provided) to save for a home, heaven and stars help you if you decide to, get married, and have kids in your mid to late twenties. If a couple has kids, someone must either stay home to watch them (losing an income in the process) or pay for day care. Day care for an infant runs $1500-2200 in Boston---Bright Horizons is around the median at $1800 a month. Sure, you can wait to start a family until you are in your mid-30s and 40s, but that's not for everyone for a multitude of reasons, and getting hit with child expenses and home expenses all at once in your 30s isn't exactly great either.

Most people don't make $50-60K right out of college though. So add a 2-5 years to that figure at least and you have people waiting to buy homes and start families well into their mid-thirties.

This is precisely why so many young families leave MA. Still, my husband and I, non-natives both of us, love it here and would like to stay, although sometimes we question our wisdom in doing so. Granted, there is no law that one must be a homeowner before having kids, but we know we will never be able to buy when we find the right place if we don't do it in this order...the added expenses of childcare would make it impossible to save up enough money.

My parents are boomers and my grandparents were brought up in the depression-era. None of them have any clue on how young families are supposed to get their start with so many things working against them that they simply never had to worry about, or certainly not the level that exists now. So, in my opinion, comparing life now to how it was for people purchasing first homes before 2000 is like comparing apples to oranges. If raising minimum down payments to 10-20% would drop prices, I'm all for it--but I doubt current homeowners would like that.

I think 10% is reasonable, but I think rather than making blanket rules for everyone, people should be evaluated on the merits of how they've handled credit in the past. For some very responsible buyers, 5% might not be unreasonable, 10% is certainly do-able, especially considering what closing costs run.

People are missing a basic point

20% down may be painful, but the banks are tired of losing money. And going bankrupt.

So a lot more of them are going to require 20% down for all but the best credits.

Not because its the law, but to protect them in the future from the situation we are going through.

I'm amazed by how many people don't understand the huge hit that 20% down will have on Boston prices. Shows how little grasp of basic economics there is out there.

Whatever happens, we are in a deflationary credit cycle in real estate. "Location" has nothing to do with that. The syndication market has been stomped on, and Banks are in trouble - Buffet decided to stop insuring deposits today. Lehman is fighting not to go under.

Broke Bakns + fewer, safer, loans. SImple

Jason wrote:
"Having said all of that, how on earth would we ever have been able to come up with 20% down plus closing costs of 5% plus a cushion for the extras for this place, even with the 15% we're saving and the $40,000 we were lucky enough to have given to us by her family? To live up to the standards Morici wants us to return to, that would have required us to have roughly 30% of the home value in the bank (20% down, 5% closing costs, 5% reserves), or roughly $81,000. Even with the initial $40k in the bank, that would mean raising another $41,000. We're saving 15% a month, so that would take about 3 years. If we didn't have that initial $40k, it would take more than 5 years to save that amount of money. But note that the money is being saved in our retirement accounts, which we really shouldn't be emptying out to fund a house purchase, so in reality we would have to wait even longer to have a comfortable cusion."

There are two ways to live up to the 20% down payment standard: Save more or save longer.

My wife is a stay-at-home mom. I make five digits and we have six months salary in the bank which we're not willing to use as a down payment. I'm currently putting 12% of my income into a 401k for retirement, and another 25% into a money market account to save for a down payment on our first house. It means staying in an apartment smaller than we would like, eating out less, cutting back on luxury spending and a light christmas, but that's just something called being a grownup. We ought to be able to start house hunting next year.

If you want something bad enough, you figure out a way to get it, but you have to work for it, and you have to wait for it (for example, until your student debt is paid off). Seems like this generation of first time buyers doesn't want to do either, then complain it's worse than the great depression when someone suggests they try.

It wasn't greed that did this to the housing market. It was entitlement.

I still don't get why the crisis is due to down payment and all these ppl are blaming the lending policy. Maybe I don't have brains but in those "good" days, lending money to ppl with no down seems a no-brainer too! Even if they default, the bank might still recoup the cost by selling the house (quickly, right?). ppl list this and that as basic economics. But there is no basic economics in terms of housing. Big down payment can reduce house price? It will keep ppl renting and there goes demand. Basic economics, right?
IMHO, if we really should discuss down payment, we should discuss in a stable environment. I personally think downpayment should only be connected to commission fees and closing costs. those are the money that you are bound to lose, in any market, up or down.

Again, someone is going to have to explain to me why we should LEGISLATE that people put 20% down. The only thing that serves to do is assist the banks in recouping losses from a foreclosure because they'll be able to take whatever equity people had in their homes as collateral in the event of a foreclosure.

What really needs to change is lending standards. No more of these exotic ARMs for first time home buyers who have no idea what they are getting themselves into. Stop letting people pull equity from their homes and use them as ATMs. I did hundreds and hundreds of closings in the early 2000s as a real estate attorney and I could have told you that this meltdown was coming. People were being incredibly irresponsible with their borrowing and expecting that the bank wouldn't give them the money if they didn't figure they could handle it. Wrong. The banks are idiots. They will give you more money than you can safely afford because the lending standards in the industry need serious tightening.

The increased downpayments people keep talking about are simply a HORRIBLE idea. Not only does it wipe out the possibility of home ownership for an enormous group of people - it also punishes borrowers and rewards banks for risky behavior. Now when people get foreclosed on, the bank takes any savings/equity they had in the form of the enormous down payment. If the banks don't care whether their interest in the property is protected, there is absolutely no way we should legislate a bottom line for them. Let the free market figure it out. Eventually the banks will get tired of getting burned and will come up with their own solutions for fixing this problem.

Forcing people to come up with $80K+ in cash to buy a first home is simply not realistic. Insist on higher income:debt ratios and tighter lending standards. Again, no exotic loans to help shoehorn first time buyers into homes they can't afford. More realistic home appraisals and no more using homes as ATMs.

20% down also helps to ensure that your monthly payment is reasonable and affordable.

I don't understand these people who got 0% down loans and clearly didn't give a thought to how impossible shelling out $4k/month for a (probably interest only!) mortgage payment really is.

I guarantee that all the folks who are for 20% down and are ripping on the 20-30 year old's struggling to save bought their homes way before the prices went through the roof. Keep in mind holier- than -thou crowd, none of you could afford to buy your own home in today's market.

Wow. Tons of opinions on this one.

First question – what had did 20% come out of? Is this legal, or is this just one of those things all banks agree on

Now, as everyone has said – the math. If I made 100K/y that means I can afford a 300K house. 20% down makes 60K. At 500/month savings, that’s 10 years. The house won’t still cost 300K in 10 years… (forgiving the fact that a down payment means I can get more house, in this case a 300K mortgage plus the magical 60K down makes a 360K home purchase budget. Same problem either way) ((What’s sadder a 300K home in Boston is either 300 square feet, or in the neighborhood where you read about shootings…. Sigh. But that’s for another blog posting :))

For those who think saving 20% means responsibility – chances are the mortgage on that 300K home, even at 95% financing will be LESS THAN MY RENT PAYMENT. This is the old inequity. People who already own a home get a tax break, but we renters get no tax break, pay more for rent than a mortgage will cost, AND are expected to save huge amounts of money for this down payment. What’s wrong with this picture???

Awesome Point Lori!!!

These people couldn't afford the homes they are trying to sell and expect our generation to stretch and extend ourselves to buy... Well people in my generation are waiting some because we have to others because we knwo it would be a terrible decision to buy at todays prices. Wait for another 15% decline so that $360,000 home would be selling at $306,000... then the payments would be more inline.

people put 20% down. The only thing that serves to do is assist the banks in recouping losses from a foreclosure because they'll be able to take whatever equity people had in their homes as collateral in the event of a foreclosure.

You are a real estate attorney? My eyes are bugging out of my head.

The house is collateral in the event of a foreclosure. That's what a mortgage lien is. Of course a bank expects that the collateral will be adequate to pay off the debt in the event of default. That's what collateral is.

However, a bank cannot take your equity over and above the amount needed to satisfy your obligation to "recoup losses." The word equity comes from the phrase equity of redemption--the homeowner's right to proceeds of the sale above the amount owed. That is, if you owe $300K on your house, the bank forecloses and auctions it for $350K, you get a check for $50K. Yes, really.

So the bank can't "take your equity." It only collects the amount due on the loan, plus probably some costs. And if you owe it, it ain't equity.

Forcing people to come up with $80K+ in cash to buy a first home is simply not realistic.

No, first homes priced at $400K are what's unrealistic.

Marcus - requiring 20% downpayments means that people have to come up with tens of thousands of additional funds to make a purchase. Those are funds that will require people to pull money from retirement accounts, investments and savings. In the event of a foreclosure, that money is then lost to that borrower and is transferred to the bank. You're asking people to REQUIRE this in order to get a loan. I say that is ridiculous. All you're doing is shifting the risk of loss from the bank to the borrower. If the bank doesn't require this in the first place, why would we ever LEGISLATE such a thing?

Whatever your feelings on what the proper price is for the value of a home - what do you expect will happen if people who already bought into this market suddenly see their equity cut instantly in half? If a house currently worth $400K in today's market suddenly becomes worth $200K - you think that crisis in confidence and that stranglehold on the economy is a GOOD thing? You think the small benefit to those currently locked out of this housing market is worth the financial turmoil an equity loss of that magnitude would cause everyone else? That's pretty far out there my friend.

Sorry man, normally, I agree with some of your posts, but this one leaves me scratching my head. Understood that the house is the collateral on a loan to the bank - but you've got to be kidding me if you don't see that you're shifting a massive risk of loss from a financial institution that can certainly handle it to Joe and Jane Shmoe who most certainly cannot.

Additionally, your failure to comprehend what will happen should the value of homes in this area and around the nation suddenly drop by 50% or more as you seem to suggest surprizes me. Talk about naive. I appreciate your altruism, but holy cow, what you're suggesting is pretty far beyond the Pale.

I should add that if you think people EVER get any equity out of a foreclosure sale, you clearly don't follow these things too closely. I have an idea - try to purchase a house as a short sale. Slog through that process and let me know how it works out. Try to buy a house that is in foreclosure. See how many months it take you to close. The headaches associated with working with banks on these deals are legendary, which only serves to drive down prices and lose any possible equity former homeowners might have had. Trust me - banks make the process a pain in the butt in order to avoid taking a quick loss on their books. The idea that a homeowner would recoup any equity in that situation is laughable - particularly when you tack on exorbitant attorneys fees for foreclosure, broker's fees, and all the other associated costs.

You simplify this stuff to the point where it's absolutely unrecognizable.

To #78 - let's say you only put down 5% on a $400,000 home. That means you need to finance $380,000. What's the montly payment on something like that? Probably around $4,000 with taxes and insurance (not even counting the upkeep). If a family makes $115 K a year, like someone above, that's probably just under or about $6,000 a month take home. Is this really affordable if a person needs to pay 65-67% of monthly take home income on housing? That's like waiting for a financial disaster to happen. I don't want to patronize the borrowers, but unfortunately, people getting in over their heads often affects the rest of the population in various negative ways. Just read the everyday news.

Perhaps I am naive, but I still think that the economy as a whole will benefit from some further price drop. Perhaps lower prices will generate some activity on the market and people will go back to work in the housing sector. Perhaps consumer spending is so low right now because people are stuck paying those expensive mortgages leaving little disposable income for other things. I don't know, but I think prices exceeding incomes by a factor of 3-3.5 instead of 5-6 is a reasonable expectation. That's all I am advocating.

We were very fortunate and able to put 20% down on a ~400K house without any handouts from family, inheritances or lottery winnings. However I realize we are very much the exception to the rule. We worked very hard and made a lot of sacrifices many of our peers wouldn't dream of making in order to make this happen.

Where did this magical 20% rule come from? My understanding has always been that the banks have all sorts of advisors and risk assessors for this very reason - they evaluate the habits of borrowers and came up with the conclusion that 20% is that magical threshold where they feel the risk diminishes enough to make them comfortable to lend to you. It's as simple as that.

Marcus - requiring 20% downpayments means that people have to come up with tens of thousands of additional funds to make a purchase.

First, to clear up any confusion: I wasn't the one who proposed a specific minimum down payment of twenty percent. I could see first-time buyers putting down less. But I am adamantly opposed to very low- and no-down payment programs, such as the ludicrous Down-payment Assistance Program. Your down payment must be real, and it must come from your own savings, or you aren't fit to buy a house. That's not just an opinion; it's fact, borne out by decades of statistics on the failure rates of loans with various minimums.

Second, though, all the squealing about high down payments reveals a fundamental misunderstanding of how markets work. The fact that a 20% down payment now represents such a huge sum is proof that housing prices are far too high--not supported by incomes, but only by loose credit standards. If more people had to pony up 20%, prices would fall, and then that 20% wouldn't hurt so much.

but you've got to be kidding me if you don't see that you're shifting a massive risk of loss from a financial institution that can certainly handle it to Joe and Jane Shmoe who most certainly cannot.

I am quite opposed, in principle, to the downshifting of risk throughout society--from defined pensions to self-managed 401(k)s, for example. But a higher down payment has nothing to do with that; I'm amazed you think it does. Of course a homeowner always takes the first haircut when housing prices fall. He's the owner. He also gets all the appreciation when prices rise. This is how ownership works. Debt is different. You have to pay what you borrowed, whether you've made a good bet with your borrowed money or not. If you do well, the bank can't come knocking for a little extra. In the same way, if you lose money, you still owe the Man.

You seem to have the idea that buying a home is some sort of shared risk partnership between you and the bank. It isn't. And if banks catch on that people have started to think this way, you can say goodbye to mortgages--and current house prices--forever.

If a house currently worth $400K in today's market suddenly becomes worth $200K - you think that crisis in confidence and that stranglehold on the economy is a GOOD thing? You think the small benefit to those currently locked out of this housing market is worth the financial turmoil an equity loss of that magnitude would cause everyone else

House prices are going to return to normal levels no matter what. Doesn't matter who thinks it's good or bad. Here's a quote, thanks to Calculated Risk, from the Lehman conference call today:

"[The Lehman] base case assumes national home prices drop 32% peak to trough, vs. 18% to date, with California down 50% vs 27% to date."
-- Ian T. Lowitt, Lehman CFO

Inflated prices of any asset are bad for the whole economy--both when they pop, and when they inflate in the first place. Not just "those currently locked out." But they always correct eventually. It's an axiom that the cure for high prices is high prices.

High down payments would have prevented this. And prevention would have been a lot easier to take than the cure is going to be.

For first-time buyers, the down-payment should depend on things like debt/income ratio and credit history, not a flat percentage. Not all home-buyers have high incomes or parents who can provide down-payment money. It's pretty much impossible for a first-time buyer making median income ($53,000 in 2004) to save $80,000 while paying rent and student loans. If you're unlucky enough to get laid-off or sick, especially if you end up needing surgery, it's even harder.

For all of the people decrying 100% financing, many WWII veterans got 100% financing throught the VA. Without that, many suburbs wouldn't exist.

To #83 - But how do you make a monthly mortgage payment every month if you are a buyer making $53,000 financing 100% at current prices? Can somebody answer this PLEASE!? What is the realistic monthly payment supposed to be for this kind of income? Fine, no down payment. Then what? I think it is pretty clear that the next step is either foreclosure or the government bailout.

I promise not to post here anymore, but explain to me how will little or no money down help if house prices are 5-6 times family incomes right now?

"You seem to have the idea that buying a home is some sort of shared risk partnership between you and the bank. It isn't. And if banks catch on that people have started to think this way, you can say goodbye to mortgages--and current house prices--forever."

I never said it was a shared risk partnership - but risk is an undeniable and inherent factor in the bank's decision to back you as a borrower - which is why your credit score is such a huge factor in determining your rate for accessing the money you're looking to borrow. The bank looks at your dealings in prior financial transactions to determine whether or not you are a good risk.

Along with your credit rating, the bank looks at the amount of your downpayment as a factor in the rate they charge you to borrow the money. If you're doing a low- or no-downpayment deal, you are going to get gouged on your rate anyway. That's how the bank protects its interests. Banks KNOW that if you're not kicking any money into the deal up front, you're already a crummy risk, and they compensate accordingly via your rate.

What it sounds like you're proposing to do is to mandate higher downpayments. This then forces borrowers to put more cash on the table up front and put their financial well-being more at risk. It shifts more of the burden of risk onto the borrower and off of the bank. You may not conceive of it this way, but I guarantee you, the bank does - which is why they look at the downpayment and credit rating as factors. Maybe the average person doesn't think about this risk-assumption dynamic when they are considering a house purchase, but it's certainly the way the bank looks at it. You're placed in a risk basket based on your credit score and downpayment, and eventually your loan is traded on the open market based on these factors.

Again, it's not a shared risk partnership at all. If anything, in many ways your interests are diametrically opposed to the bank's. But it certainly is a transaction predicated on risk.

RE #85:

"What it sounds like you're proposing to do is to mandate higher downpayments. This then forces borrowers to put more cash on the table up front and put their financial well-being more at risk. It shifts more of the burden of risk onto the borrower and off of the bank.

First off, I haven't seen anything in Marcus' posts that suggest he wants the 20% down payment to be legally enforced. Saying that something should be a certain way is different from saying the government should make it that way. I like chocolate ice cream, but I don't want the government to make everyone sell only chocolate ice cream.

Second off, why the heck shouldn't the burden of risk be on the borrower? It's the shift of risk away from the borrower that got us into this bubble.

"Again, it's not a shared risk partnership at all. If anything, in many ways your interests are diametrically opposed to the bank's. But it certainly is a transaction predicated on risk."

Actually, I think the risks are pretty well aligned. The bank wants you to pay back the loan, you want to keep your house. What's diametrically opposed about that? The bank doesn't want the house, it wants its money back.

And I must reiterate that the burden should fall on the borrower, because the borrower is the one getting the most out of the transaction. If I borrow a hundred dollars from you at 10 percent, and pay it back to you in one lump you get $10. I, however, get the use of the $100 for a tenth of the cost. You are risking that I won't pay back the $100. If I don't pay it back, I lose whatever I spent the $100 dollars on, and you get stuck with something that's technically worth $100 but you'll never get that back in actual dollars.

This transaction is manifestly unfair to the lender, which is why banks require down payments or stick you with high interest rates. You are essentially buying a lower monthly rate (thus actually reducing your own financial risk) while simultaneously reducing the risk to the bank (because they don't have to give you as much money) and reassuring the bank that you're the sort of person that can handle money and therefore can be trusted to pay the loan back.

I fail to see how this is somehow unfair to the buyer unless you think that $400k for a three bedroom house in a flood zone is a fair price.

The housing market is not a Burger King. You can't have it your way any time you want it. Ownership of a house isn't an inalienable right, it's something you have to earn. If you aren't willing to earn it, you shouldn't be buying.

And, as Marcus said, if the median income is incapable of affording the median house, the market is out of whack.

On another note, I find it highly amusing that the same sort of people who complain about the high price of gasoline find it so horriffic that anyone would want house prices to decline. High gas prices are bad but high house prices are good? How does that work? Is it just because of who gets the profit?

To #80- financing $380,000 at 5.75% (average rate from bankrate.com as of 9/11/08) for 30 years plus taxes of about $3600/yr equals a monthly payment of roughly $2600 not $4000. That is doable for a couple earning $115,000 who do not have other burdensome debt.

High down payments don't increase borrower risk. They reduce it--because they prevent a buyer who shouldn't be a homeowner from becoming one in the first place. This is well-proven.

Plus, MA is a recourse state. You're on the hook for the full amount you owe, even if the bank doesn't recover it at auction. It can come after you for the remainder any time it likes.

You really need to take a closer look at the way the mortgage market works. You seem to think banks regularly expect the value of their collateral to decline below the loan amount, and are OK with it. They're not. They expect to recoup the full balance upon foreclosure. A national home price decline is a recent phenomenon, and banks still haven't adjusted.

If you really think banks should cheerfully accept a high probability of loss through negative equity, you really want much, much higher mortgage rates than we have now.

The phrase "If you don't have money, you should not buy a
house." is kind of unreal. If this logic applies, almost nobody is able to buy a house. A person is considered to have money is if that person is able to pay full in cash. Otherwise, if a person has to borrow, he/she does not have the money. When a person is borrowing, this person is actually gamble with their future earnings to be able to repay (whether this person does 3%, 5%, 10%, 20%, or more)

IMO, any percentage down payment is reasonable, as long as the individual does the homework before buying. As long as you are able to save 10-20% of your monthly net income after all liabilities are paid each month you are good regardless of down payment.

people should really read and re-read what marcus posted until they understand what he is saying.

Which is so inarguably correct that I feel a tad absurd saying I agree with it.

I actually think that due to selection bias people who post here are actually more knowledgable about the real estate market then average. This is really frightening, and I'm going to revise my 2009 bottom projection out to 2010. The capitulation lag is just amazing.

In case anyone wonders why I hang out here, its a really great source of raw data on outlook.

Its a pretty horrible deal, as a quick perusal of the documents makes clear. You have very little in the way of rights, as there is a ground lease with stringent terms.

The lack of affordable housing is as much a matter of zoning as anything else. If more development was allowed in town centers, the situation would be much improved. The MV Times has covered this issue in depth, with its usual high quality.

I actually would not personally donate to many of the island affordable housing organizations, much as I am strongly in favor of more affordable housing on the island, and even have toyed with developing some. (still toying, in fact... )

Greg D. said this about my post:

"There are two ways to live up to the 20% down payment standard: Save more or save longer.

My wife is a stay-at-home mom. I make five digits and we have six months salary in the bank which we're not willing to use as a down payment. I'm currently putting 12% of my income into a 401k for retirement, and another 25% into a money market account to save for a down payment on our first house. It means staying in an apartment smaller than we would like, eating out less, cutting back on luxury spending and a light christmas, but that's just something called being a grownup. We ought to be able to start house hunting next year.

If you want something bad enough, you figure out a way to get it, but you have to work for it, and you have to wait for it (for example, until your student debt is paid off). Seems like this generation of first time buyers doesn't want to do either, then complain it's worse than the great depression when someone suggests they try."

and Nikos said this:

"As a comment to Jason, half of a newly graduated couple: Yes, tuition is ridiculously high, as are housing prices. Still, aren't you making the assumption that one or two years out of college you *should* be able to afford buying a house? Gen Y is buying homes earlier than previous generations. "

This kind of anti-youth attitude is what's so puzzling to me. First, I don't think that any of you will be able to find statistics saying that first-time homebuyers were significantly older in "the old days" (whatever those were) than they are now. Until relatively recently, most people *didn't* go to college and if the did they didn't rack up huge debt, most couples *didn't* wait to have kids until they could afford them and if they did that didn't mean waiting past child-bearing age, and most families *didn't* have two wage earners applying for a mortgage. I would venture to guess that the median age of first-time home-buyers 50 years ago was the same or younger than today.

Our combined salary for TWO is 25% over the median salary for Boston for a family of FOUR. I'm 33 with a bachelor's degree, my girlfriend is 26 with a master's. In what world does it make sense to suggest that we are somehow whiny crybabies with a sense of entitlement because we want to settle down and have the same sense of stability that the older generations enjoyed when they reached the same level of income? And furthermore, if we can't do it, what chance does a less financially lucky couple have? Or a couple that wants to have kids before both parents are 30? Or god forbid, a SINGLE wage-earner?

I sincerely doubt that even the most frugal of the folks suggesting that 20% is the magic number and that us youngsters are just a bunch of crybabies is willing to take a 50-70% cut in the value of your individual homes, but that's what's going to have to happen in your scenario. I also doubt that those of you harping on my generation's "sense of entitlement" had to live three roommates to an apartment into your 30's to afford an apartment within 20 miles of your job, had to buy $180 textbooks 4 classes a semester for 8 semesters, or had to make any of the other sacrifices we have to make. This current generation is a lot more frugal than you'd like to believe because we don't have a choice--daily life is significantly more expensive in regards to our incomes than it was for the 2 or 3 generations that preceded us.

The key point of my original post was not to take sides one way or the other--I was simply making an observation that both sides seem to agree on: housing prices in Boston and many other areas of the country, even after a recent "correction" are still way out of line. This is partly due to the lax lending standards of recent years, partly due to lower down-payment requirements, partly due to historically low interest rates which allowed people to borrow larger amounts for the same payment, and partly due to some weird national mass hysteria that fed the housing bubble.

But now prices are high and we have to deal with it, just as we have to deal with the fact that we're putting graduates out there with what used to be considered a mortgage payment attached to their entry-level salaries, just as we have to deal with a huge national debt and a failing infrastructure that at some point is going to require each of us to pony up a bit more in taxes or user fees or some sort of payment to the government. It seems really strange to me to suggest that the best way to deal with all of this is to enact policies that are almost surely going to cause home prices to plummet and cause all kinds of godawful pain to the economy.

The other scenario, one far less likely because of the politics and level of national cooperation it would entail, would be to figure out a way to retool our economy so that incomes could begin to rise to the point where today's house prices become affordable. At the same time, we'd have to find some market control that would hold house prices relatively steady so we could actually catch up. And it would help if we could figure out some way to reign in medical costs and educational expenses. If we could figure out all of that--or at least make a passing attempt at figuring it out, which is more than we're doing now-- we'd have a chance at national prosperity. Trying to adjust home prices in a vacuum without looking at all the other things affecting first-time homebuyers (and the sellers looking to profit from selling to them) is madness.

But I'm far too cynical to believe we'll get a holistic view of our economy any time soon from the current crop of politicians, so I fully expect a decade or so of severe, great-Depression-era financial pain to unfold. Clamping down on the available pool of homebuyers with things like a return to 20% down payments while ignoring the new financial burdens imposed on them by education, childcare costs, and healthcare costs is the best way I can think of to start that cycle of misery and deflation.

"On another note, I find it highly amusing that the same sort of people who complain about the high price of gasoline find it so horriffic that anyone would want house prices to decline. High gas prices are bad but high house prices are good? How does that work? Is it just because of who gets the profit?"

In a word, yes. You have millions of older Americans on fixed income who have few assets other than their house value as a nest egg. You have millions of Americans who are nearly finished paying off mortgages who are going to be looking to tap the equity in their houses to pay for their kids' educations, to pay for repairs, to pay medical expenses, what have you.

I completely understand the desire to drive down market prices so that everyone can afford a decent place to live. I also understand the concept that income levels do not justify the lofty prices houses are fetching in today's economy. What I don't understand is what exactly you guys are proposing to do about it. If it's just to deflate the value of homes willy-nilly, I'd go ahead and think again. There are millions and millions of American homeowners who would be up in arms about that idea.

You say that Marcus isn't advocating higher downpayments (or at least not a 20% minimum). Fine. What is he advocating? For every action, there is an equal and opposite reaction. If you introduce new market forces without considering the likely consequences, you could easily make problems much, much worse. I think what you're seeing now with the incredibly tight financing requirements and the general stagnation in the real estate market is a step in the right direction towards returning a little fiscal sanity towards what many feel are hyper-inflated home values. I have no problem with that. But I do have a problem with unconsidered, drastic steps that could throw the housing market and the US economy into even DEEPER turmoil than it already is.

Marcus makes a good point that we're probably going to need to see further corrections to house prices to make the market more accessible and less risky for borrowers. But some of the suggestions on here are pretty radical. It took over a decade for the housing market to get as super-heated as it was recently - you can't just pull the plug on that right away without serious consequences. I could see small, measured steps over time to improve financial restraints and increase borrowing requirements. But anyone suggesting an immediate requirement of 20% downpayments has a screw loose.

What I find surprising in this argument, is that some of the respondants seem to feel that saving for the downpayment is the only time you need to save. Once you have the house, the saving stops. That could not be less true. Houses need work, even if you aren't "improving" your property, it will need a new roof, a new furnace, a new hot water heater, repainting/staining, the driveway will need to be repaved, the toilet will break. These are the facts of homeownership.

A homeowner needs to be able to save a decent amount of cash each month to have a reserve fund just to cover necessary home repairs. If you can't save any money at the end of the month renting, how are you going to be able to save any money at the end of the month (when your costs will actually be higher since homoeownership costs > rent right in this market)? You can't expect to keep tapping into a HELOC like 10 years ago. So yes, you should have to prove to the bank and yourself that you can save money, or else you are not a good risk for a home loan. End of story.

"High down payments don't increase borrower risk. They reduce it--because they prevent a buyer who shouldn't be a homeowner from becoming one in the first place. This is well-proven."

Is that the goal though - preventing homeownership to an entire class and stifling upward mobility? I think banks were much too lax with who they were giving loans out to during the bubble because, let's face it - not everyone has the capacity to handle the responsibilities of home ownership - financial or otherwise. There's no question that even in the best markets a certain percent of homeowners are going to be foreclosed on because of job loss, death of a breadwinner, medical issues, etc. Some borrowers are just not organized enough to pay their bills, etc. A certain percentage of foreclosures are simply unpreventable. The question then becomes what is an acceptable number? To what extent do you loosen or tighten lending requirements to increase or decrease the number of average annual foreclosures given market conditions? Clearly, banks went too far in lending money during the bubble with a stated goal of making housing available to everyone. Where is the middle ground?

I never said banks should be happy with a negative equity situation. But just as they are rewarded for taking risks on borrowers in good markets when a full equity return is virtually assured, they are also punished in poor markets with losses of principal during foreclosures. Presumeably they charge high enough rates to compensate for this risk of loss. Sorry, you're not going to find me crying over spilled milk on behalf of banks since I've seen how they act (or fail to act) on proposed short sales, and it is absolutely atrocious. If they start doing more to help borrowers in trouble, then maybe they'll get a little more sympathy from me, but as a whole, the industry is absolutely pathetic when it comes to assisting borrowers with foreclosure alternatives.

You're only looking at the mortgage market from one perspective - when the banks lose money on a deal - and failing to consider the exorbitant rates they charge risky borrowers to compensate for this risk. Believe me, if banks were honestly concerned with losing money during periods of rampant foreclosure, they would be pushing for more protection for themselves. They are not. Why? Because when the market is good they make money hand over fist - just as they did during the late 90s to mid 2000s.

I love that everyone is concerned about poor Bank in these deals. Forget about the fact that they gouge risky borrowers with ridiculous rates to compensate. Believe me, if banks were honestly concerned about foreclosure protection, they would have been pushing for legislation to protect themselves years ago. You need to watch the documentary "Maxed Out" about how banks and credit card companies make nearly all of their profits on high-risk borrowers because they are allowed to charge them insane rates to borrow money. The steady, stable borrowers are NOT their bread and butter and do not pay their bills. The high risk-high reward borrowers are a bank's best friend.

My husband and I wanted for a few years after college to save for a home. We took our insanely cheap north of boston rent (700 a month) and what we planned on spending for a morgage plus taxes/insurance/etc. (around 2200 a month) and saved the difference. We lived as if we were paying the morgage, at first paying down debt with the extra 1500 a month then putting it in a saving account. After doing this for 2 years, we knew we were financially able to purchase a home. We had nowhere near 20%, but we are planning on living in our home for over 10 years and financially, it was as if we had already been paying the morgage. Its a year later, and we love being homeowners in our little house, around 20 miles north of Boston. I suggest doing this 'experiment' to any of my friends that are planning on purchasing homes.

This thread has moved into the realm of magical thinking. Sorry. There's no sorcery that's going to make no-downpayment buyers into good borrowers, no magic wand that will support current house prices, no magic hat out of which the essentially bankrupt US banking system will pull capital to lend, no fiscal sleight of hand that will let the federal government rain bailouts down on everyone without losing its AAA rating.

I'm not arguing a point. I'm just explaining reality. Best to deal with it.

"I'm not arguing a point. I'm just explaining reality. Best to deal with it."

I hear what you're saying about the loss of marginal borrowers from the market and the potential impact that will have on the price of housing stock - and I think you have a point when it comes to certain areas where first time homeownership is common. As they say, a rising tide lifts all ships - and I think certain "undesireable" areas saw unwarranted appreciation during the run-up and will be strongly impacted by the loss of low end buyers. I'm talking specifically about the Dorchesters, Lowells, Brocktons - places where home prices rose to exorbitant levels for no other reason than the fact that buyers had easy access to credit.

I still believe that the majority of the towns around Boston will most of their value quite well - perhaps taking a small hit in addition to the amount already experienced. I just feel like people are talking like you're going to get into a Wellesley or a Belmont for $300k - and that's just ridiculous. Even towns like Reading, Arlington, Somerville, Medford - they might take a bit of a hit from the loss of some buyers here and there, but in my estimation, the bottom end of the market will take a vastly disproportionate hit. So I guess if that's where people are looking to live, I think that there will certainly be some good bargains soon.

To back up Marcus (should be utterly unneccesary). He's just describing the reality we live in. Saying the new reality is painful doesn't mean it won't happen. I find the concept of November in Mass painful, but I'm pretty sure it will still happen.

And yes, it will happen to Welleslley or Belmont or Newton as well. Anywhere where loans and salaries determine prices. Just as a rising tide lifts all boats, a falling tide sinks all boats. It happened to those towns last time in 1990, why will an even bigger housing recession be any different?

300k for those towns? Maybe. Depends how ugly things get. 500k for those towns? Starting to look reasonable.

Once again, take a look what happened the last time. I have friends who bought a nice place in Wellesley in 1996 for 300k and change.

Wo, wo, wo, wait a minute there cma, you mean you actually ran the numbers, developed a financial plan and implemented that plan? :). Good for you. Nice to know there are still some people out there that exhibit some financial intelligence.

20% and no exceptions. What ever happened to saving - maybe even purchasing a two family to help pay the mortgage or (gasp!) a super small home and moving up years down the road???

MAYBE if those down payments were high enough we wouldn't have the walk-aways that ultimately end up affecting all of us.

i like 1% down...as long has you can show how you're going to pay the mortgage