Image: Miniature home on sheet of percent signs © Comstock, Getty Images

Before the 1980s, 20% down payments were the norm for most homebuyers. At some point, we may return to that standard. But we're not there yet.

People need to know this, because some news stories about changes to the mortgage markets have convinced potential buyers that they have to have 20% of a home price saved before they can buy a house.

"The fallacy is that you have to have a 20% down payment," said Keith Gumbinger, the vice president of HSH Associates, which publishes mortgage and consumer-loan information. "The reality is that you have to have at least some down payment."

That's a big enough change from the boom years, when zero-down mortgages were easy to find even if you had lousy credit. These days:

  • Most zero-down offers have disappeared unless you qualify for a loan backed by the U.S. Department of Veterans Affairs. Even then, military borrowers have to maintain at least tolerable credit scores; minimum scores vary by lender but are typically above 620.
  • Most borrowers with small down payments these days wind up with FHA-backed loans. The Federal Housing Administration's required down payment is just 3.5%, and FHA loans now make up about a third of the mortgage lending market.
  • If you have a bit more put aside -- say, 5% -- you might be able to qualify for a conventional loan, which is what the mortgage trade calls loans that are sold to Fannie Mae or Freddie Mac, said Bob Walters, the chief economist for Quicken Loans. But that's only if home prices in your area aren't falling off a cliff. In so-called declining markets, a 10% down payment would be required.

Liz Weston

Liz Weston

Here's the thing: When you put less than 20% down, you have to pay for some kind of insurance to protect the lender from the higher risk that you'll default. With FHA loans, mortgage insurance is built into the payment. With conventional mortgages, you have to buy private mortgage insurance. But private mortgage insurers these days aren't always willing to do business.

"It's very difficult to get mortgage insurers to write policies in many markets with (a 5%) down payment," Gumbinger said.

It's in part the troubled state of the private mortgage-insurance market that has some pundits questioning whether 20% down payments will once again become the norm.

Many politicians have called for the dismantling of Fannie Mae and Freddie Mac, whose bad loans required a government takeover. Without Fannie and Freddie, though, mortgage lenders would probably become much more conservative about lending money. Thirty-year, fixed-rate loans could disappear or at least become more expensive relative to less-risky (to the lender) adjustable-rate loans. (See today's best mortgage rates in your area.)

And lenders probably would require hefty down payments unless private mortgage insurers became a lot more willing (and able) to write policies.

Few in Congress are eager right now to tackle the issue of what to do with Fannie and Freddie. So that particular problem will likely be kicked down the road until after the 2012 elections, Gumbinger said.

But the 20% standard may be delivered in another form. Part of the Dodd-Frank financial-reform bill requires lenders to retain some of the risk of the mortgages they make instead of foisting all that risk onto investors who buy the loans. Only loans that meet high standards, known as qualified residential mortgages, or QRMs, will be exempt from this risk-retention rule.

The question now is how high the QRM standards will be, said Mona Marimow, the senior vice president of marketing for LendingTree. Bank regulators have been pushing for a 20% down payment requirement. Lender lobbyists want it to be 10% or lower, saying a higher requirement would shut out many first-time buyers and devastate what's left of the real-estate market.

In either case -- the dismantling of Fannie Mae and Freddie Mac or a QRM 20% down payment standard -- people with smaller down payments would still have access to FHA loans, although those may become their only option.