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How Much Should I Put Down / Equity Is No Protection / Liquidly Is

By
Services for Real Estate Pros with The Real Estate Investment Institute 1retiredsage

I recently tried to displace the myth that real estate and mortgage professionals could determine what you can afford. See: How Much Can I Afford / A Stupid Question, for most of you what you can afford is going to be less, sometimes considerably less than you can qualify for.

Now that you've determined what payment you can comfortably afford, it's time to consider how much you should put down on your new home.

For most of the last forty years my next question would have been, "how much do you have?" That's still where we need to start, for we can't normally put down more than we have. We also need to determine where the money came from, can it be easily and timely replaced? We need to know where it came from because the lender will not accept "mattress money" for your down payment and closing cost. We need to know how soon you can replace it, because you need to retain liquidly (your own cash available to you).

Allot of professionals have been advocating higher down payments in the current mortgage crisis. Such bad advice could best be described as testosterone laced bovine droppings!

I can understand those that are selling you the house or the money. They are all to often ignorant and inexperienced. Then there are those who are anxiously willing to trade their integrity and your money for a quicker, surer commission. The inept and the immoral have always been with us. I group them tegether only because of the common desire for easer closings.

The other group, the one that disturbs me the most, is the knowledgeable guru that mistakenly advises that you need greater equity to protect you incase the value declines. Who are these pious prophets trying to protect? Certainly not the home owner!

Lets start with the idea that equity protects you incase the value plummets. It's true that you will lose money if the value should go down, that won't change weather we're talking about equity (cash) or your loan exceeds the value of the house. For any given scenario the gross amount of the loss is the same if the property goes down $30,000.00 from what you paid for it, it goes down $30,000.00!

If you had put an extra $30,000.00 down at the time of purchase who was protected? You've lost $30,000.00, but the bank still has equity (remember it was an extra $30,000.0 of your hard earned cash), that's it the bank was protected! You are protected from going "upside down" but is that desirable or false security?

Borrowing small amounts from your home equity is extremely expensive in the best case, if you've gone "upside down" it is nearly impossible and is certainly impractical! On the other hand, if you'd made a lesser down payment keeping you remaining cash in savings, all you have to do is ask for the cash you need! But, what about that "upside down" mortgage? What about it? The payment remains the same, probably allot less than you could rent a similar home for! When you make the 360 TH payment it's all your's just like you'd agreed to.

But, what if I loose my job, we could loose the house! Well lets look at the two possiblesituations, you made the large down payment, you can't make the monthly payments, if the bank foreclosures quickly they can recover all or most of their money, you've got 3 to 6 months to move to the street. If you'd keep your money in savings you've got several months cash available to let you look for a solution, if the bank forecloses they are going to lose money, they are going to be much more willing to work with you to avoid foreclosure. You might want to read: Risking Everything / Sharing The Risk

Who's protected by larger down payments?

So how much should you put down? How much have you got? Once you've determined what you have available and what is acceptable to the lender, you should determine what you need to keep in liquid reserve. Conventional wisdom says you should have 6 month income, your personal number could be higher or lower. Now you know what you can put down, remember closing cost.

So should you use it all? Not necessarily. Mortgage programs have certain thresholds once you've met one there is no additional savings until you reach the next. For conforming loans, Fannie Mae or Freddie Mac the numbers are; 3%, 5%, 10%, 15%, and 20% the rate and cost don't go down between 5% and 9.99% so if you can't reach the next level I recommend you keep your cash on hand. FHA cost the same weather you put 3% or 10% down, of course cost are applied to the loan amount.

So how much should you put down? As much as you can comfortably afford!

Your loan originator can and should tell you your afterlives, but only you the home buyer can determine what you are comfortable with. Assuming reasonable credit you can still get almost any request.

Now go buy a house!

Bill

William J Archambault Jr

The Real Estate Investment Institute

Posted by

Bill

William J Archambault Jr

The Real Estate Investment Institute

wja@reii.org      Cell 832-259-7078,      Houston 832-582-8415,       Las vegas 702-516-1569

     http://www.reii.org  Back Cover One House At A Time http:www//reii.orghttp://www.flippingforfunandprofit.info/ http://www.billarchambault.com   

From my past: GRI 1975, FLI 1974, Catalyst from a client 1974 an agent that makes things happen, REII, The Real Estate Investment Institute 1995.

http://www.reii.org

©William J Archambault Jr   ©The Real Estate Investment Institute   ©REII

Comments (18)

Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

While no one knows what someone "could" afford I will go with DU guidelines on the new payment. For the most part it works.

Now when you talking about buying I am not sure if are talking about investment or OO property. Agree that this is not the time to buy an investment property. As for OO, yes if you would sell today you may (or may not lose your DP). Like stocks, the only way you "lose" money is when you sell. Not by what your neighbor sold their home for.

As for banks pushing. They are not pushing, they are changing the rules. It is no longer the clients choice to put 0 down. To help control the market if they want the home, the bank wants a partner with the money and now it is the clients turn to put up or rent.

Happy Selling!
Tony Grego - Indiana Mortgage Company

Feb 17, 2008 10:19 PM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Understanding leverage is hard work.  Don't forget the mortgage interest deduction. 

Good article William. 

I've often wondered where the idea came from that "if the market falls, I'll lose money".  Seems to me that they won't lose money unless they try to sell and the house won't sell for what they paid for it minus the tax deduction from which they benefitted and the difference between the mortage payment and the rent they would have paid. 

Computing "money lost" is more complicated than most folks believe.

 

Feb 17, 2008 11:02 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Tony,

We are talking about O/O, Owner Occupied homes. Which is convent, because we'd have some disagreement over investment opportunities.

I never mentioned -0- down, wait until the next chapter. -0- is still an option, just not first choice.

This post is open to the public, so let me talk about "DU". "DU" or "Desktop Underwriter" is a on line loan underwriting, decision making program. If the buyer can be approved "DU" they will get a very good loan at desirable rates. That said if the down payment is more than you can comfortably afford, there are alternatives! Don't let anyone "push" you into spending more than you're comfortable with.

That said if you can get into a "Conforming" loan you'll save in the long term and be happier with the loan longer. An exception is FHA, they require a down payment, but it doesn't necessarily have to be the buyer's money. VA, doesn't require a down payment, the Dollar Down, is only required if it's written into the purchase contract. Both FHA and VA are considered very good loans! Other -0- down programs are going to cost more.

As I said: "Your loan originator can and should tell you your afterlives, but only you the home buyer can determine what you are comfortable with. Assuming reasonable credit you can still get almost any request."

Thanks for commenting.

Bill

Feb 17, 2008 11:33 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Lenn,

Amen!

People will believe what they want to. Since 1984 liberals in Congress have been telling us that spending an extra billion or two over the previous year is a budget cut, if they wanted 5 to 10 billion more and people believe it.

Bill

Feb 17, 2008 11:42 PM
Jennifer Monroe
Indigo Home Team powered by Compass - Charlotte, NC
Real Estate REALTOR®/Broker/Designer

I like to see all homeowners go in with reserves. And I don't work with 100% buyers for the same reason - they don't have any money! It's looking as if 3% is about to become the minimum down payment soon anyway. Great discussion!

"...testosterone laced bovine droppings!"        - Sounds like something someone else I know would write - LOL!

 

 

Feb 18, 2008 02:30 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Jennifer,

FHA may be going to only 1.5%.

I think your friend would probably reduce the though to just a couple of letters.

Thanks for stopping by. You always brighten up the blogs.

Bill

Feb 18, 2008 02:58 AM
» Bill Burress Nationwide Mortgage Originator
» Bill Burress Nationwide Mortgage Originator - Fort Myers, FL

Bill:

Good post.

In today's mortgage climate a larger down payment is frequently required due to more stringent underwriting guidelines.  I remain a staunch advocate of not putting down more than you have to.  You are very correct in stating that liquidity is better than equity for protection.

In the event that the borrower gets behind on their payments, a lender has more incentive to begin foreclosure proceedings on the borrower that has more equity than the one that has little equity.  Those out there that are saying more equity is protection, they are right.  More equity is protection for the lender.

Feb 18, 2008 05:35 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Bill B.

Thanks.

I think we agree.

Bill

Feb 18, 2008 07:16 AM
Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv
REISA - 317-663-4173 - Indianapolis, IN

Hey Bill!

Sorry if I misunderstood but I hear from past clients about how much money they are losing (these are folks that plan on staying in the home and bought just a year or two ago). Funny, they complain to me and I did not sell them the home. Just did the financing and doing follow up.

Folks that have purchased in the last year or two really need to wait this one out for a while. The good thing in Indiana is that we did not have the massive gains in values and just hope we do not get the big drops.

Happy Selling!
Tony Grego - Indiana Mortgage Broker

Feb 18, 2008 09:42 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Tony,

You said northing to be sorry about.

Mortgage brokers are todays whipping boys. To your clients, we're guilty because we're not as well organised as say the REALTORS. We're guilty when there is possibly no guilt involved. We're guilty because we're pointing fingers at each other. We're guilty because of all the real estate professionals, we're the least understood.

You're welcome here anytime and I look forward to you. The great thing about this forum is that as serious people participate the blogs keep getting better. It's not necessary to agree with us, all most of us ask is be prepared to develop and defend your ideas.

Bill

Feb 18, 2008 10:28 AM
Rich Kruse
Gryphon USA, Ltd. - Columbus, OH

Bill,

It has always been simple math to me.  Put down the amount that will get you to a comfortable monthly payment while still having some left over "just in case".  If you don't have that amount, save.

I'd like to hear a post about interest only loans.  Like 0 Down, they are not for everyone but can work for many if worked right.  Seems that if you get that kind of a loan, but make the payments like you would on a PI loan, you come out ahead.  Am I missing something here?

Feb 18, 2008 09:33 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Rich,

You said: "It has always been simple math to me.  Put down the amount that will get you to a comfortable monthly payment while still having some left over "just in case".  If you don't have that amount, save."

I couldn't agree more!

The next post will talk about -0- down. I hadn't planed on interest only, I'm not an advocate. Most interest only loans cost more and have very little savings.

Bill

Feb 19, 2008 06:01 AM
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Bill A, "So how much should you put down? As much as you can comfortably afford!"

And I thought the answer was as little as you can get away with. Are you sure I'm not right?

If people want to protect their equity they should invest it somewhere else besides their house.

Bill Roberts

Feb 19, 2008 02:17 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Bill R,

You know what they say about great minds thinking alike. The more knowledgeable the client the more likely both our answers are the same,

Preach as we do some people don't agree with high leverage. The fools.

Bill

Feb 19, 2008 02:23 PM
Tina Merritt
Nest Realty - Blacksburg, VA
Virginia Real Estate
Yes buying a house is a business decision; however, in this market, I'm seeing people worry too much about the #'s.  A house is SHELTER.  Shelter is a NECESSITY.  No, you're not going to make a fortune on this house, but you are fortunate to be able to afford one and take care of it.  So, accept it and enjoy it...it's your house, it's your piece of the world.
Feb 19, 2008 02:58 PM
Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
iBrandPlan

As usual....preaching to the choir. I'll just sit up here on the risers and wait until you finish the sermon. I'm the one yelling AMEN at the end.

Feb 19, 2008 07:30 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Tina,

I think we agree, but I can't be sure. Buying a house is in deed a business, but if you can afford it a buying a home should be a decision of the hart!

Our universal need for shelter is what makes a home different. I wrote about this last September in Bunk, BUnk, BUNk, BUNK.

Thanks for commenting.

Bill

Feb 19, 2008 11:41 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Brother Stampe,

Your voice always adds a great tone to the choir.

Thank You.

Bill

Feb 19, 2008 11:45 PM