Consider two scenarios for a home at $400k, 5% interest rate (although the interest rate matters little for this purpose). Home-owner 1 puts 20% down, taking out a $320k loan and pays $1,700 a month (plus insurance, taxes, etc, but those are constant regardless of the financing, so let’s keep int simple.) The Bank is happy because there’s 20% down, right?

Let’s take option two, a fully financed $400k purchase is roughly $2150 a month. More expensive on a monthly cash flow basis, but home-owner #2 now has $80k in the bank, which buys him 3 year’s worth of mortgage payments before he has to contribute a single additional dime.

In today’s world of wage reductions, layoffs, uncertainty, etc., wouldn’t the rational approach for both parties (lender and home owner) to horde a reserve of 3 years mortgage payments? Because if Home Owner 1 loses his job, the bank isn’t going to stop demanding payment because he has 20% down. They still want to get paid $1700 every month. Not committing the 20% down allows both parties a 3 year cushion during which time conditions will change, drastically providing greater stability for all parties.