The Arizona Republic - October 2006In an era when credit is easy and debt entails no shame, down payments have been downsized.
Hardly any first-time home buyers make an initial payment equal to 20 percent or more of their home's value, the old standard. Some people finance everything.
"I didn't put down anything other than earnest money," said Ray Crook, a 24-year-old loan collector who bought his first home in west Phoenix late last year. "I just didn't have the money to do it."
He is hardly alone.
First-time home buyers made down payments of just 2 percent on average, a survey released in January by the National Association of Realtors found. About 43 percent of respondents put down nothing. And of those buyers who did make a down payment, nearly one in four relied on cash gifts from friends or family
"You don't need a down payment these days," said Tim Disbrow, manager for Wells Fargo Home Mortgage in Phoenix.
Incidentally, first-time buyers in the Realtors' survey had a median age of 32 years and a household income of $57,200.
"A major trend we see is putting down as little money as possible and doing something else with the cash," said Erik Lutz, president of Great Southwest Mortgage in Phoenix.
"I see very few people subscribing to the belief of wanting to own a home free and clear."
Repeat buyers, it should be noted, do tend to make larger down payments. They put down an average of 21 percent of their home's value, according to the Realtors' survey, and 11 percent of repeat buyers paid all cash. The typical repeat buyer is 46 years old with household income of $83,200.
Several factors explain the downsizing of down payments. One is the common expectation among buyers that housing prices will continue to escalate. Also, residential prices in recent years have outpaced personal-income gains, creating an affordability gap that has forced some people to rely more on borrowing.
"Our industry has encouraged (low down payments) thanks to credit-scoring models that accurately predict default rates," Lutz said.
Banking regulators lately have articulated a need to tighten lending standards in various ways. Yet low down payments and other easy-credit policies haven't shown up in a wave of troubled loans.
At midyear, just less than 1 percent of home loans were in foreclosure, virtually unchanged from a year earlier, reports the Mortgage Bankers Association. Delinquencies also have been stable.
Still, deals with low or no down payments are riskier than less-leveraged mortgages, and problems could arise if prices stagnate, unemployment surges or a shock hits the system. "I honestly believe that when people save the money they put down on a house, they're better off," Lutz said.
