Dispelling the 20% Down Payment Myth

In the past,  I have received questions regarding my comment about down payments not necessarily having to be 20%. There is a government proposal that could have significant impact on the future of the housing industry: the QRM, or Qualified Residential Mortgage, as part of the Dodd-Frank Act. According to the proposed QRM definition, lenders must hold 5% of the risk of any given residential loan unless it is considered a QRM, which is a loan that has a 20% down payment and meets other debt-to-income and borrower credit history requirements.

While QRM would not automatically preclude loans from being originated with less than a 20% down payment, these loans will cost significantly more, as the lender will be required to hold a percentage of the risk.

So it seems the speculation and debate surrounding QRM is causing some low-down payment home buyers to believe they will not be able to obtain financing. These prospective home buyers are hearing that lenders will no longer approve them for a mortgage unless they have at least a 20% down payment. It appears this belief stems from misinformation from recent media stories and even some loan officers and real estate agents.

This is simply not true. Mortgages are available for low down payment buyers, both through the FHA and through conventional loans backed by private mortgage insurance.  I’m working with a buyer right now who’s getting a conventional 3% down loan!

While news stories continue to emphasize nothing but “doom and gloom” scenarios, the reality is that market conditions have changed for the better in recent months. While the housing crisis has led to an increase in underwriting risk considerations, a more “normal” lending environment has resumed in a majority of U.S. cities and mortgage rates are some of the lowest in years. (3.87-4.87% today) These low rates, combined with good deals on home prices, equal a time of unprecedented opportunity for potential home buyers.

But potential home buyers need credible, reliable housing finance information and they can find this information through partnerships that we have established with mortgage loan professionals who are up-to-date on the best possible options for buyers. As real estate agents, we are one of the most powerful influencers in the home-buying process, with the ability to provide clarity on misconceptions surrounding the current market and to encourage potential home buyers who may have put their home purchase plans on hold to resume house hunting at full speed.

Otherwise, qualified buyers with low down payments may turn away from the market based on a misconception, which is a lost opportunity for them to purchase a home at a time of high affordability. This is the last thing anyone wants at a time when new buyers are needed to help the market recover.

© Patty Ross, KRXA Radio Show #218 November 4, 2011