Requiem for the Traditional Down Payment
Posted May 30, 2008 @ 5:36 pm, Viewed by 251 Visitors, Read 263 Times.
Rest in peace, o’ traditional twenty per cent down payment. Your days of relevance are over in this new millennium. Most people today would think you were loopy and run for the door if you said they needed 20% down to finance a home. There are so many buyer’s assistance programs out there that the need to have a sizable down payment to impress a financier are over. As one small example, FHA/VA loans have been the better loan of choice these past few months because their rates have been running lower than Conventional rates. FHA/VA loans can still offer loans with minimum downs of 3% or 100% financing!
Some of that will change this summer when FHA will start adjusting their mortgage insurance premiums depending on credit score and loan to value ratio. So riskier borrowers will have a higher mortgage insurance premium to pay and borrowers with good credit will have their premiums go down
But when comparing Conventional to FHA, the Conventional comp isn’t a package requiring a 20% down. The general comparison rates shown for conventional loans advertised are usually 30 year fixed with 5% down.
I must tell you that in my wildest dreams as a twenty five year old, I would have never thought I could buy a house with five per cent down. You had to have that twenty per cent and/or a gift from Aunt Lilly to get approved for a conventional loan. According to the National Association of Realtors Survey of Buyers and Sellers in 2005, 43% of first time buyers were putting 2% down payment on their home purchase. That’s the good news.
Is this a coincidence that 2005 was just about the time the housing bubble started falling apart? Without that 20% down equity, many homeowners started finding themselves upside down in their equity and the house they were making payments on was worth less than the loan. Of course with a 20% down, if their house devalued they lost some of their down payment; but that is better than paying on a house that is worth less than the loan. So in tough times, the twenty per cent down can be a handy cushion. If you are going to stay in a house long term, you will see its “on paper value” rise up and down.
So is the twenty per cent traditional down payment really dead? For now, yes it is, but there is always a catch.
· You are going to pay higher monthly payments when you forsake the traditional twenty per cent down.
· The lenders are now carefully scrutinizing your credit report and the home’s loan to value is playing heavily on your ability to buy. The riskier you are as a buyer, the more you are going to pay the lender in all sorts of ways.
Perhaps it isn’t a good idea to eulogize the traditional down payment just yet. Investors who want to make the most profit will still pay from 20% to 25% down for loans. The financial consultants today will tell you the same thing they told people twenty years ago. The best way to buy a home is to save, save, save and pay at least the traditional 20% down payment. What’s wrong with smaller monthly payments and a little instant equity when you get to closing day?
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Diana Peterson is a licensed Oregon Broker with Prudential Real Estate Professionals in Roseburg, Oregon. Douglas County living is the best kept secret in Oregon. Read More
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2% to 5% down for a house payment can still be difficult for some families to achieve. Even with the assistance out there it can be hard for some to get into homes. Of course the best way to get there is to save you money. But what most people have problems with is leaning how to do that.
I am working with an online bank named FNBO Direct, (you can check out their website at www.fnbodirect.com) they are putting on a YouTube contest that is encouraging people to "Pay Yourself First" You should check out the web page (www.pyfchallenge.com). Your readers could earn an extra $5,000 for their down payment, and a spa vacation. All they have to do is create a one-minute video telling FNBO Direct what they’re saving for, and why they should be selected as one of the five challengers... Upload the video to the group page (http://www.youtube.com/group/pyfchallenge) by July 31 to win. Heck FNBO Direct is giving a $10 gift card just for submitting a video and $500 to the top 20 videos. So just by submitting a video you at least get something!