The Return of the 10% Down Payment


Remember the 10% down payment on a house? After virtually disappearing for years, it’s back.

Around the country, some lenders are offering 90% financing again on all loan types. For example, San Francisco-based RPM Mortgage resumed offering “piggyback” loans in the first quarter of 2013 after discontinuing them during the height of the credit crisis in late 2007, according to Vice President Julian Hebron. (A piggyback loan enables a home buyer to put only 10% down without having to buy mortgage insurance. This is done by getting two loans totaling 90%.)

In Monroe, NY, Rosalie Cook of Weichert Realtors says she is seeing buyer down payments range from all cash to as little as 5%. Mortgage lender Tom Gildea of Prospect Lending in Rockland County, NY agrees, saying that he’s doing loans with as little as 5% down “all day long.” Those 5% down deals are with private mortgage insurance, are only for conforming loans (less than $417,000) and are reserved for borrowers with excellent credit, verifiable income and little debt.

Mortgages used to be easy

Before the credit crisis of the mid-2000s, getting a home loan was simple. Your down payment was small — if you even had to make one. To qualify, all you had to do was “state” your income and sign on the dotted line.

Of course, that was the kind of lending that got us into the credit crisis. After the bust, many lenders started requiring a minimum of 20% down. Coming up with that much money was a stumbling block for many would-be home buyers. In addition, buyers were already worried about the economy or were uncertain about their jobs, making buying a home not only difficult but also downright scary.

The result: Even though home prices had plummeted and mortgage rates were at historic lows, many potential buyers were forced to sit on the sidelines for years.

Today, many real estate markets around the country are heating up again. While the economic recovery still has its fits and starts, people are feeling confident about their jobs. They’re watching their 401(k) and stock portfolios climb back to pre-2008 levels. And so, they’re out looking for homes to buy again.

Lenders have loosened up but are still cautious

Mortgage lenders are seeing these trends, too, which is why they’re starting to ease down payment restrictions. This time around, though, lenders are much more discerning about who gets to put 10% down. As RPM Mortgage’s Hebron puts it: To qualify, your monthly housing, car, student loan, and credit card debt can’t be higher than 45% of your monthly income. And you must have a credit score above 700.

The good news is that more potential buyers who otherwise would have been shut out of the market, due to the lack of a 20% down payment, can now jump in.

Leveraging cheap money

Even if you have the 20% to put down, you might consider opting for a 10% down payment instead. For instance, if you’re buying a home that needs a lot of work, you could put 10% down and use the other 10% to finance improvements. You might even consider investing that 10% in stocks or mutual funds, though that comes with obvious risks.

A 10% down payment has its disadvantages, too. If you put just 10% down and home prices decline later, you could end up underwater — owing more on the mortgage than your home is worth. When that happens, you could be stuck in your home, unable to sell — just as so many homeowners were after the housing crisis kicked in around 2006-2007.

Also, if you have little equity and you go to sell, you could face another problem. The size of your loan, along with the costs of selling your property, could total more than the sale price, a financial hit that can be tough to absorb.

If you qualify for a 10% down payment, and it’s the only way you can get into a home, it may be worth the potential risks. Bottom line: Talk to your mortgage professional and real estate agent about your options. Think strategically and long-term about what you’re doing. Don’t just make a 10% down payment because you can.

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Brendon DeSimone is a Realtor and one of the nation’s leading real estate experts.  He has collaborated on multiple real estate books and his expert advice is regularly sought out by print, online and television media outlets including FOX News, CNBC, Good Morning America and Forbes. An avid investor himself, Brendon owns real estate around the US and abroad and is licensed to sell in California and New York. You can find Brendon on Facebook or follow him on Twitter or Google Plus.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.