9/30/2011 12:28 PM ET|
Return of the 20% down payment?
The days of zero-down mortgages may be gone, but the 20% minimum isn't always necessary for homebuyers. Still, there are good reasons for making it a savings target.
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.
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.
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'bout time. I know the good people that think they 'deserve' a house of their own do not want to hear this, but if you can't produce 20%, you are probably not going to make your payments.
I build for a living. During the 'boom' I regularly had people come to me to get houses built. 100% financed for 3 years (sometimes 5) with low payments. 'Countrywide', heard that name enough. And I would try to explain to a couple that 'yes, they could make the payments today. But in a few years, when that $700 payment went to $1900, they were going to lose everything. You can't make that payment when you only make $2500 a month.' No one listened. They used to get mad at me. Lost a lot of opportunities by being honest. But I'm still building and the shyster builders, mortgage brokers, realtors, etc., are gone. Along with a lot of peoples dreams. 20% should be a minimum down payment.
We should go back to the 20% down payment. Saving money and spending frugally is lost in American society. Most people are credit happy and spend thrifty, then expect Washington to solve the debt problem. It was Americans that "drove the car into the ditch". Everyone had to build bigger homes, many of which people couldn't afford.
Today, young people are protesting "bankers", for "taking all the money". Folks, Americans busted themselves.
People have become addicted to credit like the alcoholic that needs a drink.
The housing bubble and resulting collapse was caused by many factors, there is really no single cause to blame. With that said, I've seen friends through the years make one big mistake.........OVERBUYING.
For example, when I bought my current home the realtor told me I could afford $100,000 range "easily". I asked her, what if I lose my job and end up working for Wal-Mart ? She says "oh, that's not going to happen", while keeping her eye on that higher commission. GREED.
I bought a home for half that and ended up retiring early, still able to make my mortgage payments on my lower income. This is called PLANNING.
Agreeing to a mortgage, regardless of your down payment, is a SERIOUS COMMITMENT.
It is also an INVESTMENT with NO GUARANTEE of appreciation.
IMO if anyone believes they can walk away FOR ANY REASON, this should be the most serious black mark on their credit and should remain there for what the remainder of what the mortgage time would have been.
But this kind of threat should NOT be why you live up to your commitment.
If that isn't clear...you have no business receiving credit from anyone.
To: STEVE SMITH: it's still a badge of honor in my book - actually 2 badges. The first was an honor to receive the loan from our bank, the second was to have it paid in full. We just made our final mortgage pmt - 12 yrs to pay off our 30 yr fixed. It's a glorious feeling to have 0 debt and to have saved so much interest. In late 2008 we decided that "we and our house" were a better investment than our retirement accounts. So for 2 years we've made double pmts AND extra principals here and there. Our home has doubled in value since our purchase, even factoring in about a 20% reduction in value the last 24 months. We believe this was still the best plan for us. Our house is really OUR HOUSE. Yippee
Short story! 1972 I used my State va loan for the purchase of a 1644 sq. ft. home for $21,000. payment withtaxes was $120. a month. I sold the house in 1979 and got a 2400 sq. ft. home cost me $678. a month house cost $65,000. 3 times more house cost than the first house and payments w/taxes was over 5 times more. what I am trying to tell young people buy your house and KEEP IT it's cheaper in a few years than you can ever imagine. that house today is now worth around $190,000. and the bigger house is somewhere around $250,000. first house 9 times in value 2nd. house @ 4 TIMES. Todays low interest rates are lower than I payed for house #1 and about half the rate of house #2 buy your house and KEEP IT!! you don't have to keep up with the jone's ,make it a home and you will be better off NO MATTER WHAT THE BANKS SAY!!!! it's worth.
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