Down Payments are Back

This article was originally published by in October 2008.

If you're buying a home this fall, you'll need a down payment of anywhere from 3% to 25% of the purchase price, depending on your lender, your credit score and where you're buying.

Just a couple of years ago, almost anyone could get 100% financing. Down payments were a relic of the '80s and '90s, sort of like Pac-Man and grunge rock.

But such irresponsible lending is why foreclosures are at a record high, the banking industry is collapsing and the economy is headed for a serious recession.

So the down payment is back.

"100% (financing) is gone," says Jim Pair, president-elect of the National Association of Mortgage Brokers. "What we're doing now is what we did 10, 15, 20 years ago as far as lending is concerned."

That's a good thing -- even if you're a first-time buyer.

Buyers who save for a down payment are likely to be successful homeowners. It forces them to manage their money more smartly and spend more frugally.

Having equity in your home -- that's the difference between what your home is worth and how much you owe on the mortgage -- is critical for your financial well-being.

Millions of families who borrowed every cent they needed to buy a home are now upside-down on their loans. Home values have declined, and they owe more than the property is currently worth.

It's virtually impossible for them to sell or refinance unless they have tens of thousands of dollars in cash to make up the difference. And most don't.

That's why so many buyers who used 100% financing can't escape the rapidly rising payments on their adjustable-rate mortgages and are losing their homes to foreclosure.

That doesn't mean we've turned back the clock 20 or 30 years to when lenders demanded 20% down payments from everyone. But you will need:

3% of the purchase price if you:

* Can qualify for an FHA loan.

The Federal Housing Administration was created to help first-time buyers, especially low-to-moderate-income families and minorities. The federal government guarantees repayment, so the lender knows it will not lose money on the deal.

That allows the bank or mortgage company to offer competitive interest rates on a loan that's easier to qualify for than a conventional home loan. The trade-off is that you'll pay a bit more in interest.

Borrowers with credit scores in the mid-to-high 600s should be good to go for FHA-backed financing. Those with credit scores between 580 and 620 are on the bubble. A score below 580 won't work.

The minimum down payment for FHA loans is set to increase to 3.5% on Jan. 1, 2009.

A 5%-to-10% down payment if you:

* Have a credit score of 720 or higher. Some lenders will consider borrowers with credit scores as low as 620, but to qualify, you'll need additional assets, such as a retirement fund or hefty savings account.

* Need to borrow less than $417,000.

* Aren't buying in what your lender considers a distressed market -- areas suffering from the highest foreclosure rates and steepest price drops. About 9,600 ZIP codes in 34 states have popped up on various lists, with California, Florida, Michigan, Arizona, Nevada and Ohio particularly hard hit.

A 10%-to-15% down payment if you:

* Are applying for more than $417,000, which requires what lenders call a jumbo loan, and don't live in distressed market.

* Live in a distressed market but are borrowing less than $417,000.

* Have a credit score above 720. Borrowers with extra assets and credit scores as low as 620 could be accepted by some lenders.

A 15%-to-20% down payment if you:

* Need to borrow substantially more than $417,000.

* Have a credit score below 720 and no significant assets, or you live in a distressed market.

A down payment of 20% or more if you:

* Need to borrow $729,000 or more.

* Have a credit score below 680 and no significant assets.

* Want to buy in one of the very worst distressed markets. In Florida, for example, the average condo price is down 22% since the market peaked in 2005. Miami alone has nearly 50,000 units -- a record four years' worth of inventory -- for sale or under construction. Anyone who wants to purchase one of those could need a down payment of up 50%, says James Venney, a mortgage banker with Wells Fargo.

Some help exists for low-to-moderate-income homeowners who will have the most trouble saving for a down payment.

Congress recently ended the private down payment assistance programs you may have heard about, because too many borrowers who took advantage of them were defaulting on their loans.

But state-sponsored mortgage programs are still an option for those who can meet the strict limits on how much applicants can earn and spend on a home.

By Katherine Reynolds Lewis Associate Editor