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Down Payment Rules

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Posted On: 11/27/2013

Question:

Where do we stand on down payments? Will government regulators require 20 percent down on all new mortgages or not?

Answer:

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There's a lot of misinformation regarding down payment requirements, but rest assured, loans with less than 20 percent down are not being abandoned.

Essentially there are two sets of rules developed by federal regulators to govern mortgage lending.

The "qualified mortgage" or QM rules are designed to assure that borrowers have the ability to repay their loans and reduce lender risk in the marketplace.

The "qualified residential mortgage" or QRM rules establish standards for loans to be sold in the secondary market to investors. Note that "portfolio" loans are kept by the lenders who originated them and not re-sold.

The QM and QRM rules are intended to prevent another financial meltdown, another Wall Street bailout and another 7,000,000 foreclosures. Neither of the rules outright bans mortgages with less than 20 percent down, despite claims to the contrary by big banks and other lobbying groups.

The fact is, banks have benefited from the new regulations even though not all the rules are yet in place. Figures from the Mortgage Bankers Association show that profits per loan rose from $917 in the quarter before the passage of Wall Street Reform to $1,528 the second quarter of this year.

There are three questions to ask regarding the future of loans with little down:

First, are we going to get rid of FHA and VA loans, which offer financing with 3.5 percent and zero percent down, respectively? No, the new rules have always exempted FHA- and VA-backed loans.

Second, how would the real estate market benefit if we did away with the private mortgage insurance industry, an industry which has helped 25 million borrowers purchase with little money down?

Third, who believes that local communities would be better off if we eliminated the more than 1,500 down-payment assistance programs we have nationwide, many designed specifically to help first-time buyers?

Mortgages with less than 20 percent down have always been allowed under the new rules. There is no ban on real estate financing with little down, there has never been such a ban and none is planned.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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