How Much Should You "Put Down"?

Down payment requirements, for mortgage loan programs,  have increased over the past 12-18 months.  Here are some examples:

• FHA hiked the statutory down payment to 3.5%
• Piggy-back mortgages, using second liens, are all but dead.  Conventional loans, with down payments of less than 20%, require private mortgage insurance (PMI).  PMI companies have hiked down payment requirements.
• State loan programs, like the CalSTRS loan program, suspended “no-down” programs
• Jumbo loans require hefty down payments

The larger down payment requirements were implemented to “limit loss exposure” to the lenders and guaranteeing agencies/insurers.  That’s good right? Well, not necessarily good for you, the borrower.  Low down payment loans, while more expensive, help to limit buyer losses in a down market.  Low down payment loans transfer market risk from the borrower to the lending institution; it makes the borrower “too big too fail”.

That’s EXACTLY what these big banks and brokerage firms did; they borrowed so much that they became “too big to fail”.  Former Labor Secretary, Robert Reich, outlines the conundrum we face by consolidating the companies who were “too big to fail” into  larger institutions that are…REALLY “too big to fail”.

What’s that mean to you, the would-be home buyer?

You never want to borrow money you can’t afford to pay back…BUT…a low down payment loan just might give you some insurance against a declining real estate market.  It gives you LEVERAGE with the lender when things get…a bit dicey.

Why do banks rush defaulted loans, against homes with lots of equity, to foreclosure while they are more apt to “negotiate” a loan modification with a delinquent borrower who is “underwater?  Banks have to deposit a “loan-loss reserve”, with the FDIC, when mortgages become delinquent.  If the prospect of recovery is slim, some banks simply “write-off the loan” (to avoid that deposit with the FDIC) with hopes that they’ll recover SOMETHING later.

If higher downpayments “protect the lender” against market risk, it is only logical that the market risk is transferred to…the borrower.

That’s you.