Traditionally, a 20 percent down payment was standard on a mortgage loan. Ten or fifteen years ago, that changed, and lenders began offering loans with much less money down. This was good for younger families or first-time borrowers, because it meant that they could get into a home more quickly. With the recent mortgage crisis, the trend is heading back the other direction again — lenders are requiring more money down. Often this translates into a 20 percent down payment for a mortgage loan. So many borrowers are asking, “Why 20 percent?”

At least part of the reason is that mortgages are considered a non-recourse loan. That means the only security the bank has in making the transaction is the property itself. If for some reason you default on the loan, the lender can recover the property, but cannot hold you liable for any other costs.

Imagine that you are buying a $300,000 home. You only put down 5%– or $15,000. Now, imagine you are getting behind on your loan payments. You decide to take out your anger on the lender, by trashing the property. When the lender takes you to foreclosure, he is left with the property that is worth much less than $300,000, yet you still owe a sizable amount on the one. He’s going to lose a lot of money. If he had required 20% down, or$60,000, he would have had a better chance of recouping at least part of his investment.

The same thing could happen if the value of your property has dropped, due to the current market conditions or other reasons. So you can see that the most important assessment, a lender has in deciding whether to make a non-recourse loan is your own credit, and his ability to determine how credit worthy you are. Now isn’t the 20% making more sense?