I still stand firmly behind the principle that if you can’t afford 20%, you can’t afford the home.
I disagree – it really depends on the person and situation. And the cost structure of the market. If a person has an almost certain probability of having an increasing income – say graduating from medical school… ahem… and a pretty certain career path, well defined and not as likely to have hiccups… then buying with less than 20% down isn’t a huge risk.
The thing I told my kids is it is more important to make sure they have plenty of room to make the monthly nut [all costs including anticipated house maintenance and upkeep] than pay a big down payment. I would rather see them go almost 0% down on a property they can easily make payments [maybe even on one income] than buy a house with 20% down where afterward they still struggle making the payments.
Some metrics that I have always found useful:
People should avoid buying a house where their total mortgage amount is more than three times their annual gross salary. This even if they have 20% down. The Ideal max number for a mortgage is two times your gross family income or LESS. In many parts of the country prices are so high you could pay 20% down and still have a mortgage way over three times median incomes of the people living there. Places like coastal Cali or NYC. Twin Cities aren’t cheap but not terrible compared to East Coast or West Coast.
Ideally your payments, insurance, etc., should be less than 1/4 of your gross before tax income or less than 1/3 of your net after tax income – whichever constrains you first. Combine other debt [school loans, car, cc], utilities, taxes, maintenance, HOA if you have it… all combined these ‘fixed obligations’ plus mortgage payments should always be under half your gross income or never more than 60% of your net income … again whichever constrains you first. The point is that you always want at least 40% or more of your net income to be truly discretionary. And I don’t mean play money – I mean food, clothing, necessary travel, unanticipated maintenance and of course – Gopher hockey tickets. After that and saving – then play money.
Don’t buy a house that prices out at more than four times median gross family income in that area even if YOU can afford it. That would suggest it would be hard to sell if you had to sell for a forced relocation. Hard to sell because there wouldn’t be many others in that area who could afford to buy that house at the price you paid for it. So either you sell for a loss to move it or wait for a greater fool to pay what you paid. Neither are desirable. Ideally you buy a house less than 3 times median gross family income in that area. In coastal California circa 2008 houses were routinely selling for over TEN times regional gross family incomes. It was a big reason why the housing market was hit hardest there. Once house prices stopped going up – tide went out – everyone was swimming naked.