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The down payment dilemma

By Marcie Geffner ·
Monday, March 7, 2011
Posted: 9 am ET

Should homebuyers be required to make a down payment of at least 20 percent of a home's purchase price to qualify for a mortgage?

That's a hot topic in a current debate about the federal government's soon-to-be-issued official definition of a "qualified residential mortgage" or "QRM."

Once the definition and the risk-retention rule that requires it take effect, lenders will be able to sell off 100 percent of a QRM loan, but only 95 percent of a non-QRM loan. The other 5 percent of the loan must be kept on the lender's books.

Loans insured by the Federal Housing Administration -- so-called FHA loans -- are exempt from the rule, so a higher down payment requirement on QRMs wouldn't apply to FHA loans.

At least one major lender reportedly wants the government to include a 30-percent down payment requirement in the QRM definition.

The Center for Responsible Lending, or CRL, has taken aim at that proposal in a new position paper, "Don't Mandate Large Down Payments on Home Loans," which argues that small down payment loans aren't inherently (or shall we say "by definition"?) more risky than large down payment loans.

"Recent proposals call for requiring prospective homeowners to make a 10-20 percent down payment when purchasing a home. This is seen -- mistakenly -- as 'getting back to the way mortgages used to be made,'" the paper states.

The paper goes on to say that low down payment loans "have been a significant and safe part of the mortgage finance system for decades" and are "a key to the recovery of our nation’s housing market and economy."

A CRL analysis concluded that the typical U.S. household would need 14 years to accumulate enough cash for a 20 percent down payment. That conclusion was based on these assumptions:

  • A purchase price of $172,100, the national median for a detached house in 2009.
  • A down payment of 20 percent or $34,420.
  • Estimated closing costs of 5 percent or $8,605.
  • A savings rate of $3,000 per annum, or $250 per month.

Does that seem reasonable or burdensome?

Follow me on Twitter: @marciegeff

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April 28, 2011 at 3:33 pm

14 years? It totally depends on what your priorities are...we saved $14K for a down payment in 6 months with a household income of $50K (given no children...but still).

It meant going without lots of dinners out, pared down camping trips as vacations, wearing our "old" clothes, and plenty of hard work but it wasn't that bad.

April 26, 2011 at 1:06 pm

Anyone paying $1600 a month for rent needs to move. Now!

April 23, 2011 at 4:25 pm

This regulation is beyond ridiculous! If this is enacted the housing industry is doomed & the American economy will continue to tank right along with it! This is "throwing the proverbial baby out with the bath water!" The problem was not the customers, but swapping credit derivatives on Wall Street & packaging up bundles of inferior loans, from corrupt & greedy lenders. Customers have successfully been using no money down loans for over 50+ years with no detrimental outcome until the recent housing bubble fiasco. Five percent is still plenty of skin in the game, as the previous post so insightfully mentioned! One more time, Main Street gets penalized from Wall Street & The Federal Government!

April 21, 2011 at 8:31 am

All this talk about percentages misses that point that while house prices keep rising-decade to decade- incomes don't. 20% on a $50K home was reasonable for a middle class single individual. 20% on the current median home price of $157K is less feasible.

The problem isn't the down payment, it is the lack of reasonably priced housing.

March 24, 2011 at 8:57 am

A good friend and I both bought our homes in 2006. He put down 20% (about 80k), I put down 5%.

Today we are both horribly underwater on our homes, with no reasonable expectation of rebound in value for another 10 years.

Who was smarter financially? Me or him?

Now his company want him to relocate. The days of companies buying homes for transferring employees is over. OVAH.

Why would ANYONE, given the housing market, willingly put down 20% when you could have protected that money in some other investment vehicle and built on his savings.

There is plenty of skin in the game already, monthly payment, upkeep, improvements. To say that banks need 20% to protect themselves is pretty the data suggests. Good luck to rebounding housing market if you are counting families coming up with 20%.

March 21, 2011 at 7:54 pm

Single mom in California here. 20% down is not going to happen for me. No, Melissa, not even at $60k a year. I'm lucky to put aside $100 a month, and if there's a car problem, back a few steps I go. Rent is high ($1,600 a month), groceries keep getting higher, gas keeps getting higher, insurance is expensive, dental bills are insane even with insurance, and my kids have a makeshift bedroom in the living room while they keep growing older. Plus there's the student loan to pay off (yes, this single mom graduated from college). And Melissa thinks I can put away $2K a month and have a house in less than two years. I can't even afford an FHA loan. No 20% down for me.