Question Details

Jane, Home Buyer in New Orleans, LA

What's the obsession with a 20% down payment?

Asked by Jane, New Orleans, LA Mon Jul 21, 2008

I've moved to the USA from England in the last couple of years. Having owned a house in the UK since I was 23 years old I hate renting and now that I know the city I've made my home I'm ready to buy. The thing is I now find myself having to deal with the whole 20% down business.
In England every first time buyer gets a 100% mortgage, I certainly did for my first home and that's how I could afford it. Over the course of the next 15 years I built up a lot of equity in my home and it has given me a nice nest egg and now that I've sold my home over there, the chance to use that money to really help me follow my dreams. All this because I was granted a 100% loan. The majority of the British public are homeowners, very few people rent because it's so easy to get mortgages.
I was wondering why America seems so dead against giving 100% loans. It just doesn't seem to make sense especially for a country with so much get up and go, it seems a real contradiction. Anyone know why this is?

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As a loan officer as well as an agent, 20% is a recommendation for the least amount down to get you the best rate possible. As mortgage guidelines have tightened up 100% financing is virtually impossible. There are lenders that will let you put down at least 3%, but the down side is the interest rate on your mortgage is higher and you are also usually required to pay private mortgage insurance for the mortgage company. So 20% is not locked in stone as the amount you should put down, it will usually result in the best rates. Some lenders do have different requirements, such as 30% down for an investment property. Just make sure that you loan officer knows the guidlines and does not lead you astray.
0 votes Thank Flag Link Wed Jul 23, 2008
Hi Jane, the combination of escalating home prices and loose lending practices led to the mortgage crisiis we are in today. Banks have shifted from accepting - perhaps without thinking - too much risk to seemingly not wanting to accept much if any at all. The higher the down payment the lower the risk to a bank of the value of the property dipping below future market values, and in an environment in which most every market these days is considered a "declining" market, the banks want to cover the downside. We are seeing lower down payment products, but they require higher credit standings as judged by your credit score. The only product I am aware of now that does not vary the rate or downpayment based on your credit score, so long as you meet a minimum requirement (which is higher than it used to be in all cases) is the FHA product. Otherwise, your rate will vary based on your credit score and also the amount you put down.

Welcome to America!

Best of luck to you!
Jeannie Feenick
Weichert Realtors
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0 votes Thank Flag Link Tue Jul 22, 2008
Jane - great question and great insights.

To chalk up a single answer would be difficult indeed, but RISK is certainly the word that comes to mind. And in light of recent housing corrections and the liquidity crisis that emerged around August 2007, the 100% model of home financing has dramatically changed. There remain some low and no down payment options in the marketplace today, but far fewer than what was witnessed over the past half a dozen years. The Secondary Market has changed and with it, lending criteria has also taken a more conservative stance. 20% down payments are far less common these days (as equity positions have reduced or reversed in multiple markets across the USA). There are, however, wonderful opportunities for down payments less than 20%. FHA is still a prime option with reduced down payment requirements and there are numerous programs geared for industry specific Borrowers, too [Educators, Public Service, First Time Buyers, etc].

Good luck in New Orleans!
0 votes Thank Flag Link Mon Jul 21, 2008
We changed out lending practices over the past year from 100% loan back to where a family is required to place a % downpayment. Also if you are a non US resident lending is little different. GREAT QUESTION,
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0 votes Thank Flag Link Mon Jul 21, 2008
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