How Mortgage Down Payment Requirements Might Change

In mid-April, The Financial Times reported on the U.S. real-estate market:

Since house prices bottomed out in 2012, homebuyers have rushed to snap up properties… Spurred by record low mortgage rates and an improving jobs market, homebuyers sopped up existing inventories. Price rises accelerated as homebuilders struggled to meet demand and banks sold fewer foreclosed properties.

So far so true. But the FT went on to say that “droves” of investors are responsible for many of these purchases, and those buyers plan to turn the homes into rentals. Given that homeownership remains for many central to both the American dream and their own personal ambitions, why aren’t more first-time buyers snapping up real-estate bargains?

Low Mortgage Rates Not Tempting Enough

You might think that today’s home-loan deals, which are still nudging the best mortgage rates in recent history, combined with rising house prices would be enough to spur first-time buyers into the market. And, of course, many are taking the plunge. But a whole lot of others seem reluctant. Why would that be?

Well, some of the resistance might be due to down payment requirements. In recent years, if you wanted a conventional mortgage (one not part of a government-backed guaranteed loan program), you’d have to put up at least 20 percent of the purchase price — unless your application was extremely strong. Purchases with less than 20 percent down almost always require mortgage insurance, which was extremely hard to come by in the wake of the housing market crisis. Luckily, that’s changing now, although many borrowers may not yet realize it.

In the first quarter of 2013, nearly one in five conventional mortgages arranged through LendingTree had down payments in the five-to-ten percent range. During the same period in 2011 that figure was one in a hundred.

VA and FHA Home Loans Still Great Options

For many — maybe most — first-time buyers, scraping together even five percent of their purchase price is an impossible hurdle. But they can still find their way to property ownership through FHA home loans. These typically require a 3-percent minimum down payment.

The down payment requirement’s even lower for those who qualify for USDA rural housing financing or VA home loans. They can often buy a property with a zero down.

However, USDA, VA and FHA home loans (along with conventional mortgages that require small down payments) come with a downside: mortgage insurance premiums or funding fees. For government-backed programs, the rules governing these have changed recently, and — while the monthly cost may not have risen much — they’re now payable throughout the lifetime of the mortgage.

Should You Wait to Buy?

So would you be better off waiting until you have 20 percent down? There are three main reasons why that could turn out to be a mistake:

  1. House prices may continue to rise, and you could find yourself chasing — and lagging further and further behind — a fast-moving target.
  2. Few expect current home mortgage rates to remain this low for very long, and your MIP costs could quickly be dwarfed by extra interest payments once those rates start to climb.
  3. There’s a real chance of down payment rules being tightened.

The Best Home Loan Deals May Be Today’s

That last point could prove critical. On April 24, The New York Times raised the specter of stricter regulations and larger down payments. Right now, there’s a serious debate going on between legislators, regulators, economists and lobbyists about whether homebuyers should be made to find those significantly bigger lump sums when closing a purchase.

There are strong arguments on all sides of the conversation. On the one hand, some contend that insisting on larger down payments could protect the economy from a repeat of the credit meltdown that occurred a few years ago. On the other, defenders of the status quo point to data that suggest a much looser correlation than you might expect between the size of a down payment and the possibility of foreclosure.

Nobody yet knows how this debate will play out, and it really could go either way. But, if you’ve already found it hard to scrape together enough cash to close on the home of your dreams, then you might want to get your mortgage application in before new regulations — if there are any — come into force.

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