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The down payment dilemma

By Marcie Geffner · Bankrate.com
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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16 Comments
Anonymous
March 21, 2011 at 10:29 am

@ Melissa
I am not sure how a family with an income of $50k would be able to save 50% of that ( $2k/month = $24k) for a down payment. Perhaps that family is just two people and does not include children and they live in a location where the cost of living is extremely low. In agreement with the other anonymous poster, day care/after school care for our children is ~$1000 a month. By the time you factor in mortgage (which is less than childcare costs), utilities, groceries, insurance, and other necessary costs not even mentioned here, there is no way we could save $2k a month.

Brian
March 20, 2011 at 8:14 pm

I think the housing market has swung in the opposite direction. I think that if people have good credit, and can afford the payments based on reserves, and credit histy, that they should be able to put down less than the required 20%. Why should those that have good credit, and know what they are doing with money be punished, because of people who can not manage their money! I think there should be a standard, or cut off. If your credit is above this number you get 5-10% down. If you are lower, than you are required to put 20% down.

Anonymous
March 08, 2011 at 9:48 am

@Melissa

A "salary" of 50k will generally mean you are bringing home about 35k/year. That is almost $3000/month total. Even living in your means, there is rent, insurance (even if you have a paid for car), food, gas, utilities. And if you have children that need daycare, forget it! My husband and I have the same salary combined that you mention. THIRTY PERCENT of our take home ($4275/month) goes to daycare for our two children. I make more of the money and have always had consistent employment in jobs that provide benefits, so staying at home is not an option for this mom. Hubby has been more all over the place in his career path, and usually in industries that don't have benefits. Throw in rising costs of food and gas, saving 50% or 2K is not feasible.

At the same token I completely agree with previous poster, consumers have a choice...low down payment/higher priced mortgage...high down payment/cheaper mortgage. I don't take issue with 20% down. The complaint that people would have to wait 14 years is the issue! Society calls for instant gratification in EVERYTHING. So the fact that someone should have to do things the right way and have to WAIT is ludicrous to some!! THAT's the mindset that needs to adjust!

Tim
March 07, 2011 at 5:52 pm

To get the prevailing, lowest interest rate, a 20 percent down payment should be required. Mortgages can be had with lesser down payments of five to twenty percent but pmi will be tacked onto the mortgage until the buyer achieves at least twenty percent equity in the property. This is the way it was before the mortgage industry started being 'creative'. This is the way it should be now.

Travis M
March 07, 2011 at 4:38 pm

I feel 20% would be unobtainable for most families and would be a horrible idea to stimulate the housing market. The banks still need to accept a reasonable risk factor to reap their extremely large profits on each and every mortgage written.

A 5 to 10 percent down payment coupled with a true, non biased property appraisal and true borower income docutmentation is the answer here.

James V
March 07, 2011 at 3:37 pm

I have great credit (780+) and my only monthly debt is a student loan but there is no way I can come up with 20% down payment. I could wipe out my savings and do 10% but 5% is more realistic for me (I like to have $$ for a rainy day). I live outside DC so house prices are crazy. The amount I pay for rent is the same as a $400,000+ mortgage! I know my means so I am not high-risk and in fact I have been pre-approved above my means. Just don't require me to have 20% because that won't happen for a while.

Melissa
March 07, 2011 at 3:36 pm

The median household income in the United States via the Census numbers for 2009 is just under 50K.

Where did you get the $250 a month as a reasonable savings level!? With a household income of 87K a year, we can put away at least 3K a month. I would expect someone with an income of 50K a year to put away about 2K a month. That's less than two years to save up for a 20% down payment.

Paul
March 07, 2011 at 2:05 pm

I too have no problem with a down payment, 25% in my case, on the median priced single family home... But in Honolulu, on a median salary, I wouldn't be able afford the monthly repayment, plus taxes, etc. on the $450k balance. This article applies to most of the US, but how long does it take to save 20% down payment on a $600k (median price) SFH or half decent condo here? That down payment alone would buy a house for cash in most of the US. On the other hand, many people are paying cash here for an SFH, and beyond! Prices haven't come down as much as they have in the 48 states since the bubble burst; it didn't really burst here, it seems rather to have coughed a little, and then held it's breath!

Brandon
March 07, 2011 at 1:39 pm

I 100% agree with the other commenter here. I also saved up to make my down payment and it helped plan out my income/expenses to accomodate this additional house expense (prep for my mortgage).

In addition, this doesn't affect FHA loans. Thus, if you feel you are living below your means while paying less than 20% down, then go for an FHA loan. I know others will cry foul, but I see the options between A) cheaper loan but larger down payment or B) more expensive loan but cheaper down payment as a simple set of choices to give consumers and much easier to navigate than some of the more exotic financing options we have nowadays.

c.burke
March 07, 2011 at 12:18 pm

I have no problem with a 20% down payment. My wife and I, making only $50k per year, were able to save it in 2 years, living in an apartment of our own, with a disabled child. It was tough, but we did it, and I don't regret it one bit. It's called Living within your means, instead of keeping up with the joneses.