What Rising Down Payments Mean for You

Since the housing bust, banks have increased their demanded down payments on home loans. One study found that the average down payment has risen to 22% on conventional mortgage purchases. The Obama administration called for a gradual rise to a 10% minimum down payment on conventional mortgage loans.

What does all of this say about the economy, and what does it mean for prospective home buyers?

For the most part, these higher down payments are being driven by banks. Buyers who put larger amounts down are less likely to default. For this reason, banks prefer buyers who put larger amounts down.

(Historically, the average down payment tends to vary depending on market conditions.)

However, demanding larger down payments has a few effects on the housing market. By raising the necessary down payment amounts, banks are effectively limiting their customer base: fewer people qualify for home loans. In effect, this reduces demand for homes, pushing home prices lower.

Because it forces buyers out of conventional mortgages, many are left to use Federal Housing Authority (FHA) backed loans, or other federal loan programs, such as those for veterans. FHA loans only require 3.5% down. These loans often require borrowers to pay primary mortgage insurance, an added premium borrowers pay to insure their lenders against risk of loss if they default.

What do bigger down payments mean for you?

If you’re a prospective home-buyer, this new development means that you may soon be faced with some tough mortgage decisions. If you have 20% or more of the value of the home you’d like to buy saved, you’re in a good place. That amount makes you competitive for a loan.

If you don’t have that amount, you might find yourself choosing less amenable loan terms, deciding to borrow less for a smaller home, or waiting to buy while you save a bigger down payment.

On the other hand, remember that the loan shortage is keeping home prices low. While it may seem like high down payment requirements are keeping you out of the market, looser lending terms would probably mean rising home prices.

Remember, these high down payment amounts are not in any way government mandated—they’re completely driven by market forces. This means that a borrower can expect pretty extreme variation between lenders. In other words, while you can expect loan offers to fall within a typical market range, you can also expect change among lenders.

Some lenders might give you a loan with a 15% down payment or less. Some might demand 20% or more. Try calling lending officers and ask what down payments were paid in their typical recent mortgages.  Also make sure to do a hard target search for the best mortgage rates.

Regardless of lender requirements, it’s almost always in your interest to pay a down payment of 20% or more.

Putting a large amount down does two very important things. First, a payment of 20% or more will help you avoid primary mortgage insurance, a costly addition to your mortgage that offers you no real benefit. Second, the more you put down, the less you have to borrow, which means smaller monthly mortgage payments. Finally, since a larger down payment can signal less risk for a lender, it might just lower your interest rate, which also results in a lower payment.

What percentage did you put down on your current home? Are the rising down payment requirements keeping you from buying a new home?

Published or Updated: March 20, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Pamela says:

    First time home buyers should also look into down payment programs in their area. Many mortgages allow these second mortgages with a small down payment from the borrower to eliminate PMI.

    Programs usually have income limits. A good place to start is by searching for a HUD-certified housing counselor at HUD.gov.

  2. jim says:

    I’d have a hard time believing the average down payment is 22%. But I guess that could be right, if some people are making larger down payments. My friend recently bought a house with 80% / 20% secondary and effectively $0 down. He has good credit and a good job though.

  3. sonya says:

    Another blow for the housing market ever scince the bottom fell out. It hard for young people like me starting out to be able to purchase my first home. So this news is another bump in the road to acquire a mortage.

  4. very informative post but……
    First time home buyers should also look into down payment programs in their area. Many mortgages allow these second mortgages with a small down payment from the borrower to eliminate PMI.

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