Feb. 22, 2007 — Born during the Great Depression, the 20 percent down payment traditionally used to buy a house has now joined $1.50 gasoline as ancient history.
More than one in five California homebuyers now finance every cent of their home purchase, says the California Association of Realtors. Seven years ago it was 4.5 percent.
The newly released numbers reveal a shift in homebuying and lending patterns in recent years, as California home prices more than doubled.
"What I notice with first-time buyers is they're all recently married in their late 20s and early 30s. They're the ones using 100 percent financing," said Angela Talent, mortgage strategist with Folsom-based Strategic Financial Services.
The Realtors group also says that 41 percent of first-time homebuyers in the state have abandoned the notion of putting their own money into the deal. Nationally, percentages are even higher.
Nearly 30 percent of buyers and 45 percent of first-time buyers no longer make down payments, says the National Association of Realtors.
"Frankly, I didn't realize it was that easy to do," says Doug Self, who used 100 percent financing last year to buy a house in Citrus Heights.
Self and his wife, both on their second marriages with children from each, said mortgage lenders called it their best alternative after they outlined their finances.
"Realistically, if a typical house is going for $400,000, just to do a 10 percent payment is $40,000," he says. "How many people are going to scrape together $40,000 in a reasonable amount of time? That's three years of socking away a grand a month and not having anything go wrong. That's just not realistic."
In the past, mortgage lenders wanted collateral in the form of 20 percent down.
But the housing boom and its spectacular rise in home values largely erased lending risks.
That pushed the industry to flood the market with easy money.
The trend raises questions about whether a looser lending standard will affect the market during a downturn.
Some fear owners with none of their own money to lose may have fewer qualms about walking away from homes if they get behind on payments.
That could aggravate rising foreclosure rates in regions like Sacramento, where the housing market has slumped.
"I don't think there's a real significant problem attached to 100 percent financing per se," says Scott Thompson, a partner in Carmichael-based Mortgage Resolution Services. "The problem comes when the borrower with 100 percent financing goes beyond that and adds adjustable-rate features to it."
The real estate industry says its more relaxed lending methods — often bearing higher interest costs for borrowers — have helped boost state and national homeownership rates. It's also proved a significant safety valve for homebuilders and other sellers during an era when US saving rates are at their lowest levels since the Depression.
"I don't think it's going to have an adverse effect on the marketplace," says John Marcell, owner of Better Mortgage Brokers Inc. in Upland. "Just because people haven't put any substantial amount into the mortgage doesn't mean they won't make the payment."
Marcell, former president of the California Association of Mortgage Brokers, concedes the practice is a big departure from the past.
"The rule of thumb has been forever and a day that if you're going to buy a house you should have 20 percent of your own money in the house," he said.
That philosophy began to change in the 1980s and has evolved to where the typical first-time buyer nationally now brings about two percent to the transaction.
"First-time buyers probably have not done a 20 percent down payment in California for at least a decade, if not more," says Robert Kleinhenz, the Realtors association's deputy chief economist.
But the group says only 11 percent of California's repeat buyers use 100 percent financing.
Banks and mortgage firms invented many down payment alternatives during a vast restructuring of products as the housing boom pushed prices out of reach for many buyers.
A favorite alternative for borrowers is the "80-20" loan, in which a standard loan funds the first 80 percent and a second loan with higher interest rates finances a 20 percent down payment. The loans usually are rolled into one payment with interest up to eight or nine percent, Marcell says. Loan rates for 30-year fixed mortgages last week averaged 6.3 percent.
But the higher costs often are partially offset by eliminating private mortgage insurance required for homes bought without 20 percent down payments.
(Contact Jim Wasserman at jwasserman@sacbee.com. Distributed by Scripps Howard News Service.)
