Down-Payment Requirements: Are they really going up?

by Alex Stenback on February 16, 2011

Today’s Wall Street Journal publishes a great example of how even a normally excellent publication can mislead those not paying close attention, and plant popular misconceptions that are just outright wrong. 

Here’s the meat of the article:

“The down payments demanded by banks to buy homes have ballooned since the housing bust, forcing many people to rethink what they can afford and potentially shrinking the pool of eligible buyers…

…The move to force home buyers to lay out more cash is driven mostly by banks, who have found that larger down payments discourage delinquencies by increasing the buyers’ exposure to loss and reducing the impact of declining prices. Many home buyers placed little, if anything, down during the boom.”

We also read-on to learn that in the 4th quarter of 2010, the median down payment for conventional mortgages was 22%.

Now, even a careful reader would take away that banks are “demanding” much higher down payments on conventional loans and that most people are required to put down 20%, or something close to it.

But here’s the thing:  Since 2008, when the credit crisis killed zero down mortgages, down payment requirements have hardly budged. 

As of today, the minimum required conventional down payment is 5%, and even 3% is possible under the right set of circumstances (both require mortgage insurance, by the way.)  You can read it yourself right here from Fannie Mae [PDF].

The point is, down payments have clearly gone up, but it has little to do with banks demanding anything.  Especially when we are talking about conventional loans.  Fannie Mae and Freddie Mac set the rules, banks mostly just originate and service loans made under those rules.

A more interesting story might be why actual down payments are going up, when the minimum requirements have changed little.  The most likely reasons:

- Mortgage insurance is more expensive, and requires higher quality borrowers, so many avoid it a altogether by putting 20% down.
- FHA has huge market share (40-50%), and requires a minimum of 3.5% down, so many less-than-twenty-percent-down borrowers go this route.  Looking at conventional down payments as a proxy for ‘Down Payment’ ignores half the purchases.
- Today’s home buyers are investing more money up front voluntarily, because they see opportunity, and are in it for the long haul.

This is not to say that down payment requirements won’t go up in the future, but for now, they remain at quite reasonable levels, despite what you may read elsewhere.
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[Self-plug]  If you are planning a home purchase this year and a better understanding of your financing and down payment options is in order, drop me a line right here with a few words about your situation and what you are looking to do.  I’ll reply with a few questions of my own and give you a simple, straightforward understanding of your options in as little time as possible.

{ 3 comments… read them below or add one }

John Murphy February 16, 2011 at 4:10 pm

Alex, great post. I was scratching my head wondering what I could possibly be missing as I read that article. I’m not seeing down payments that high. I call it the Zillowification of the real estate and mortgage market. The WSJ seems to be relying on Zillow to somehow pull this data. If our local MLS did a better job of requiring loan information to be plugged in to the system once the home closes, we could provide a more accurate picture. Unfortunately, right now it’s hit or miss.

John Murphy February 16, 2011 at 4:11 pm

Good post Alex. I was thinking the story was a little odd and I’m still not sure it’s totally accurate reporting from the Wall Street Journal.

Lake Tahoe Real Estate February 17, 2011 at 2:39 am

Alex,

Yep. Just ask our dads how much they were required to put as down payment..

“But here’s the thing: Since 2008, when the credit crisis killed zero down mortgages, down payment requirements have hardly budged.”

It’s been going on about to go 3 years now. I just wonder how this will evolve now the Fannie and Freddie are being shaken up.

Sweet, informative post, as always

-Joe

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