A prospective client recently said to me that they heard that you need 20% down to buy a house these days. My response was a calm, collected, professional-sounding "you only need 3.5% if you qualify for FHA, other than that, sometimes 5-10% is sufficient." This was my response, of course, AFTER I initially said, "(GASP!) WHAT?? Who is going around spreading such VILE rumors?!"
My knee-jerk reaction, while tongue in cheek, is based on my incredulity that millions of Americans still believe that you need 20% or more to purchase a home.
They may not be that far from the truth if the plans to curb government guarantees of mortgages come to pass.
In a market area where more than 50% of borrowers put down less than 10%, an increase to 20% down will have a severe impact on homebuyers here. It is said that it would take the average American family 14 years to save a 20% downpayment on a home that costs $170,000 (the median national price.) In metro D.C. where the median home price is between $215,000 and $360,000 (depending on the jurisdiction), the time to save 20% would be dramatically increased.
In the 1920s an American homebuyer needed 50% or more downpayment to buy a home. But when GIs started returning from World War II with their GI Bill, VA loan benefits, and pent-up demand for a car in every garage and a chicken in every pot, homeownership became attainable and therefore more affordable and more common. America's homeownership boom began when the downpayment requirement was reduced to around 5%. The number of homeowners went from about 44% of Americans in 1940 to about 64% in the 1980s, and the American suburbs were born.
In the early 80s, 20% down was still the norm, although certain mortgage applicants could qualify for low-down-payment products as long as they met certain criteria. And the Veterans Administration continues to offer guarantees for 100% financing for the military. However, beginning in 2000, mortgage lenders began to offer prospective homeowners risky low downpayment or no-downpayment loans, regardless of their creditworthiness. Some believe that a 20% downpayment requirement in those days would have prevented the waning mortgage crisis we see now.
The proposal currently on the table deems a 20% downpayment "safe". If a lender wishes to offer a product with a lower downpayment requirement, the banks would have to hold a stake in them. This means that the banks wouldn't be able to sell them off to investors. If banks agreed to this, their costs would be higher, which would translate into higher interest rates and fees passed on to the borrower. Some analysts say that this would mean interest rates of 1/4 to 2 percentage points higher.
Fannie, Freddie and FHA would still offer their guaranteed loan programs, however, with Fannie and Freddie out the door and FHA seeing their role disappearing, those programs may end up being few and far between. Still, these changes would take years to show any impact.
Some believe the changes will encourage lenders to pursue cash-rich borrowers vs. those with less liquid assets. This could have economic impact in areas where lower-income families make up the majority of the population. For this reason, the idea of limiting the downpayment requirement to 10% has been tossed around.
Does size matter?
Those in the industry know that the size of the downpayment sometimes has little to do with the creditworthiness, or debt-to-income ratios of the borrower. During the period 1997-2006, a smaller downpayment indicated a default rate of 2.3%, almost twice the national average, the actual credit history (payments made on time) proved to be a more significant factor. Those who met the 20% downpayment requirement but had a poor credit history, defaulted at a rate of 4.7%.
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