Is the 20% Down Requirement Still Alive?

Today more than ever, a generation of homeowners will increase their debt to equity ratio by more than 30%; what has happened to increase the debt and decrease the equity? Many of the mortgage loan products available today do not require a down payment. Until recently, if you were interested in buying a home, you were required to put 20% percent down and finance the balance. Now, prospective homeowners are allowed to borrow up to 125% of the home value! This equates to a negative investment. How did we get here? Imagine this scenario: as you graduate and are ready to exit the college campus, you get married, and now you're ready to move into that first home. Do you have any money to put down on the home? No. Are you required to have any money to put down the home? No. At this point, brake lights should come on at the mortgage company; today however many mortgage companies are accelerating not stopping. Never before has there been a time when a consumer could walk a mortgage company, declare they have no money put down, and walk away with a huge mortgage. The interest only loan options and the 125 loan options are encouraging consumers to spend way beyond their financial limitations. And there is responsible for the creation and promotion of these types of loans? The mortgage companies are the creators and promoters. The increase in the popularity of the interest only loan, and the fact that it can be tied to so many different loan products, make it one of the more popular options in today's market; so popular, that it has grown to a huge one quarter, or 25 percent, of the entire market. Are these mortgage companies requiring a smaller down payment, maybe 5% or 10%? No, they aren't requiring any down payment. What message does this send to the young consumer? Not a very good one. You don't need to be a financial analyst in order to determine that 0% down equates to 0% equity, in most situations. What does this mean to the young homeowner? If there's no equity in a home, there's no security in the home; there's no encouragement to save, there's no encouragement to plan. If you begin to check with local lenders, and traditional lending institutions you will find a 20% down payment requirement is alive and well. Many traditional lending institutions realize what many mortgage companies seem to overlook: a homeowner with no investment is a very risky proposition. Something as important as your home, should be worthy of personal investment. So why are there huge gaps between mortgage companies and traditional lending institutions? Traditional lending institutions aren't as interested in the profit to be had for mortgages, as the mortgage companies. Traditional lending institutions offer a range of products to accommodate the consumer: banking, commercial loans, and savings provide other avenues of income for the traditional lender. Mortgage companies, on the other hand, exist to serve only the mortgage market. For that reason, mortgage companies are willing to extend credit without the required traditional down payment. The mortgage companies have been very creative, and we now have mortgage products to fit every type of consumer. Many of these products are very appealing to the young consumer, with very little savings. Most of these new mortgage products are designed to appeal to the young borrower, but to date, they are also appealing to older consumers. What are some of the mortgage products available that require zero down? The 1% interest loan, the interest only loan, the 125 loan, and many of the balloon note mortgage products require no money down. The standard fixed rate mortgages and the adjustable rate mortgages still were best if there is a down payment of some amount, and very few are sold without a down payment. Many of the standard loan products still require a 510 or 20% down payment and still offer a better interest rate. In requiring a down payment, a mortgage lender accomplishes two things: a cash security against the value of the home and it requires the borrower to put effort into acquiring the mortgage.