If there is one component that predicts more than any other whether a home owner will continue making payments when times get tough, it’s this one.

At some point in the process of struggling to make mortgage payments home owners will consciously remind themselves whether or not they put any of their own money into the deal way back when they purchased the home.

If the answer is no – then they will (statistically speaking) be more likely to walk away from the home when times are tough. But if the home owner either put money down or paid the mortgage down more quickly for a time, then they will feel tied to the home because they put their own money into it.

The other issue that is directly related to the down payment is whether or not there is equity in the home in the future. In this kind of market, even folks who put $40,000 down on a $200,000 home purchase three years ago still may not have any equity in the home today. That is hard to swallow all by itself; but if they had put nothing down they would definitely be more upside down than if they had.

Lenders know these stats. They understand the feelings. They’ve . . . .  been to the puppet show already and seen the strings. They like down payments – that’s all there is to it.

For the time being, the Veterans Administration and the USDA both over programs that allow a home buyer who qualifies to buy a home with no money down. FHA is next in line – they will allow for a down payment as low as 3.5%. Conventional lenders (Fannie Mae and Freddie Mac) will require a minimum of 5% down and in some markets – like Michigan for the past few years – they will prefer or even require 10% down.

I tend to look at this issue from two angles, and in this priority order:

First, is the person who wants to own a home ready to be a home owner? Are they responsible with money? Do they owe a lot of money on credit cards? That would suggest that they don’t live within their means. Do they have a savings account balance or are they living paycheck to paycheck? It’s wise to determine the answers to the above questions before moving ahead with home ownership.

Secondly, and after we’ve determined we have a buyer who will likely be successful as a home owner, we ask about which loan program they qualify for. There is no magic in putting in a down payment. If you didn’t have a down payment, you can still be a successful homeowner. We just want to make sure you’re ready for this.

Image: (alancleaver_2000 per this)

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