Wednesday, February 16, 2011

Buying a House? Expect to Put 20% Down

This is good news that looks like bad news. Buying a house isn't a right and people shouldn't be able to buy a house unless they can pay for it. Nor should they want to. Ultimately, we all pay when people buy things they can't afford. P.S., the Obama administration is calling for at least 10% down. This new norm of 20% has to do with the banking industry being more responsible. If banks only loan to those who can legitimately afford a house, Wall Street won't ever get the opportunity to make huge profits off subprime mortgages and we won't have to worry about another housing-led recession.
Most people still don't understand that if people bought their homes without a subprime loan, we never would've had a recession. Wall Street took all those subprime loans, bundled them up and sold them off as fancy financial investments. When people couldn't pay their loans as their variable interest rates doubled, it all went bust.
If you want to buy a house, there's a good chance you'll have to put 20 percent down, the WSJ reports this morning.

This is high by recent standards. But if you put 20 percent down, you're still borrowing 80 percent of the value of the house. You're still making a hugely leveraged investment. If you're like most people, you're still taking out by far the biggest loan of your life.

Requiring a higher down payment also means people are less likely to wind up owing more on the loan than the home is worth — and less likely to default on their mortgage. Planet Money