Need evidence that the mortgage industry was taking crazy pills back in 2006? Consider that the average down payment required to purchase a single family residence was 4%. If you had a heartbeat and good credit, some lenders were standing by prepared to loan 100% of the purchase price on the basis of your name, address, and social security number. We all know how that turned out. A good many of those people who thought their American Dream ship had come in are now counting down the days until they are evicted from their house via foreclosure.

Needless to say, the percentage of down payment required has been climbing rapidly, with some Washington DC politicians claiming that 10% or 20% should be the minimum. The reality of mortgage loans today is that you should expect higher down payments to become the new norm. The standard for new loans is 20%. It’s not unusual for lenders to ask for 25% down and the current average across major metropolitan areas is 22%. The skittish lending environment has made them a little leery to loan money without insuring that the borrower has “skin in the game” as they like to say.

The problem that arises from the new scenario is the vast number of potential home buyers who have good credit but no capital. Coming up with a full quarter of the purchase price as a down payment is simply out of the question, leaving government agencies as the only viable options, but Mr. Obama, having had his fingers singed by Fannie and Freddie, is rumbling about trying to get out of the mortgage market.

There’s nothing to make us think that the reality of higher down payments will be reversing itself any time soon. Expect that this is the new normal when it comes to buying a home. For income property investors, higher down payments come with a pleasant side effect – the number of renters will continue to increase because those without a chunk of money have no alternative.

The AIPIS Team

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