piggy bank used for 4-6 down payment blogAs the housing recovery slowly unfolds, many homeowners are wondering if – finally – the value of their properties has recovered from the 2007 housing crash.

Many people found themselves ‘underwater’ on their mortgages – in other words, owing more on the mortgage than the house was worth on the market. Equity gradually reappears as home values gradually recover.

But it takes more than getting back above water to move up. Ten years ago, many buyers put 10% or less down when they bought their houses. Thin down payments and minimal equity was, of course, one factor in the real estate crash. People who owed a lot and had little real ownership in their homes saw little reason to keep paying on a home loan that was tens of thousands of dollars more than the house was worth.

Partly due to regulatory pressure and partly due to common sense, lenders have largely gone back to the longstanding rule that home buyers must put down 20% of the purchase price to qualify for a mortgage. (Here’s how the Bank of America explains it to potential borrowers.) Lenders are strict about this, because they need to comply

That means that your equity is more important than ever. If your home equity is still recovering, the cost of selling could eat up as much as six percent of your equity, thanks (or no thanks) to agents’ commissions. (That’s why USRealty.com lets you choose the commission you pay, though we recommend that you pay the buyer’s agent the traditional 3% commission, so that those agents have incentives to show your house.) Home lenders keep cash flowing by selling individual mortgages to Fannie Mae and other quasi-governmental agencies. So, Fannie Mae sets the rules, and the lenders must follow those rules.

If selling your current house won’t yield enough cash for a 20% down payment on the house you want to buy next, you’ll have to come up with the rest of the down payment on your own. (Use this Fannie Mae calculator to estimate how much house you can get for a 20% down payment, and vice versa.)

Sources for additional cash include:

  • Gifts from family (you’ll have to prove to the lender that the money is a gift, not a loan in disguise)
  • Extra earnings (taking on a side job, even temporarily, can quickly top off your down payment)
  • Cashing in investments or selling valuable goods
  • Capturing an extra 3% in equity by selling through USRealty.com

The down payment is only one factor in your decision to sell your current house and buy another one. Mortgage rates are currently around 3.75% (for a 30-year, fixed-rate loan to a homeowner with an excellent credit score).

You can’t control mortgage rates, or lenders’ policies, or how quickly equity will grow in your current house. But you can control how you accumulate the 20% down payment you’ll need for your next home purchase. Deciding how to sell can be a key element in your strategy to get to 20%.