Homebuyers ditching the down payment
Born during the Great Depression, the 20 percent down
payment traditionally used to buy a house has now joined
$1.50 gasoline as ancient history.
More than 1 in 5 California homebuyers now finance every
cent of their home purchase, says the California Association
of Realtors. Seven years ago it was 4.5 percent.
The newly released numbers reveal a shift in homebuying
and lending patterns in recent years as California home
prices more than doubled.
"What I notice with first-time buyers is they're all
recently married in their late 20s and early 30s. They're
the ones using 100 percent financing," said Angela
Talent, mortgage strategist with Folsom-based Strategic
Financial Services.
The Realtors group also says that 41 percent of first-time
homebuyers in the state have abandoned the notion of putting
their own money into the deal. Nationally, percentages are
even higher.
Nearly 30 percent of buyers and 45 percent of first-time
buyers no longer make down payments, says the National Association
of Realtors.
"Frankly, I didn't realize it was that easy to do,"
says Doug Self, who used 100 percent financing last year
to buy a house in Citrus Heights.
Self and his wife, both on their second marriages with
children from each, said mortgage lenders called it their
best alternative after they outlined their finances.
"Realistically, if a typical house is going for $400,000,
just to do a 10 percent payment is $40,000," he says.
"How many people are going to scrape together $40,000
in a reasonable amount of time? That's three years of socking
away a grand a month and not having anything go wrong. That's
just not realistic."
In the past, mortgage lenders wanted collateral in the
form of 20 percent down.
But the housing boom and its spectacular rise in home values
largely erased lending risks.
That pushed the industry to flood the market with easy
money.
The trend raises questions about whether a looser lending
standard will affect the market during a downturn.
Some fear owners with none of their own money to lose may
have fewer qualms about walking away from homes if they
get behind on payments.
That could aggravate rising foreclosure rates in regions
like Sacramento where the housing market has slumped.
"I don't think there's a real significant problem
attached to 100 percent financing per se," says Scott
Thompson, a partner in Carmichael-based Mortgage Resolution
Services. "The problem comes when the borrower with
100 percent financing goes beyond that and adds adjustable-rate
features to it."
The real estate industry says its more relaxed lending
methods -- often bearing higher interest costs for borrowers
-- have helped boost state and national homeownership rates.
It's also proved a significant safety valve for home builders
and other sellers during an era when U.S. saving rates are
at their lowest levels since the Depression.
"I don't think it's going to have an adverse effect
on the marketplace," says John Marcell, owner of Better
Mortgage Brokers Inc. in Upland. "Just because people
haven't put any substantial amount into the mortgage doesn't
mean they won't make the payment."
Marcell, former president of the California Association
of Mortgage Brokers, concedes the practice is a big departure
from the past.
"The rule of thumb has been forever and a day that
if you're going to buy a house you should have 20 percent
of your own money in the house," he said.
That philosophy began to change in the 1980s and has evolved
to where the typical first-time buyer nationally now brings
about 2 percent to the transaction.
"First-time buyers probably have not done a 20 percent
down payment in California for at least a decade, if not
more," says Robert Kleinhenz, the Realtors association's
deputy chief economist.
But the group says only 11 percent of California's repeat
buyers use 100 percent financing.
Banks and mortgage firms invented many down payment alternatives
during a vast restructuring of products as the housing boom
pushed prices out of reach for many buyers. They filled
a traditional role usually assumed by family, some say.
"In an earlier day, parents would help their children
come up with a down payment. But now the lenders are stepping
in with that role," says Dolores Conway, director of
the Casden Real Estate Economics Forecast at the University
of Southern California.
A favorite alternative for borrowers is the "80-20"
loan, in which a standard loan funds the first 80 percent
and a second loan with higher interest rates finances a
20 percent down payment. The loans usually are rolled into
one payment with interest up to 8 percent or 9 percent,
Marcell says.
Loan rates for 30-year fixed mortgages last week averaged
6.3 percent.
But the higher costs often are partially offset by eliminating
private mortgage insurance required for homes bought without
20 percent down payments. PMI costs about $100 a month for
a $300,000 loan.
While the alternatives can be bewildering to buyers, the
notion of borrowing every last penny appears here to stay.
"It's a whole different marketplace," Marcell
says. "It's not what it was when my wife and I bought
our first house. It's changed drastically."
