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December 8th, 2011

Down-payment assistance isn’t necessary

by Peter Miller


Treasury Dollar BillThere has been a ton of significance placed on large down payments in recent years given our nation’s massive foreclosure rate. The mindset is that without enough “skin in the game,” without enough of a borrower’s own money put down upfront, homebuyers are less affected when their investment turns sour and more likely to walk away.

Given this mindset, minimum-down-payment requirements have increased for many home loans, making it more difficult for prospective buyers to save for those 15 to 20 percent down payments.

Recognizing the difficulties of saving for such a large sum, more and more parents are contributing to their children’s down payments or say they are willing to help financially in the future.

Vickie Elmer of the New York Times recently wrote that, during this holiday season, perhaps the best gift for some may be a big, fat check to put towards that down payment. “With most lenders requiring home buyers to put down at least 20 percent — and sometimes, with more expensive properties, an even greater amount — the best holiday gift some people might receive would be help with the down payment.”

Is it a gift or mortgage fraud?

You don’t need 20 percent down

I find it hard to believe the assumption that a lot of homebuyers are purchasing with “at least” 20 percent down. In fact, the facts dictate that we should doubt such a claim.

Most loans today are FHA, VA and conventional. FHA loans are available with 3.5 percent down, VA loans require nothing down and conventional loans with private mortgage insurance are available with as little as 5 percent down.

Furthermore, given that you can get an FHA loan for as much as $729,750, and given that such loans are entirely too big for most transactions, why would anyone worry about saving for that 20 percent?

Median down payment is only 11 percent

“The median downpayment for all home buyers [in 2011] was 11 percent, ranging from 5 percent for first-time buyers to 15 percent for repeat buyers,” reports the National Association of Realtors.

The NAR’s Profile of Home Buyers and Sellers reveals that new home purchasers typically put 13 down and those who bought existing houses put down 10 percent.

The NAR explains that most first-time buyers purchase homes with federal help. “Fifty-four percent of first-time buyers financed with a low-downpayment FHA mortgage, and 6 percent used the VA loan program which requires no downpayment.”

Who’s paying this 20 percent?

Federal rules now require that lenders demand 20 percent down if they make “risky” loans. Just like high taxes on cigarettes are designed to discourage smoking, big money up front is a way of saying that borrowers should not take on risky forms of debt, and that lenders should not offer such loans.

It’s simple, let’s stop making risky loans, because when the foreclosed property a block away is driving down the value of the surrounding homes, it affects a lot more people than just the borrower and the lender.

One Response to “Down-payment assistance isn’t necessary”

  1. Mark Swift Says: December 8th, 2011 at 4:21 pm

    Totally agree. Unwise amounts of risk and speculation — on all sides — helped get us into this collective mess we’re in, so why continue down that destructive path? Home buyers and lenders alike need to assess risks thoroughly and proceed with a reasonable amount of due diligence. If there’s one thing we all should have learned over the past few years, it’s that “hoping for the best” isn’t a sound real estate investment strategy.

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