Friday, July 09, 2010

Changing Market Rules

The mortgage industry has historically been in a state of constant flux. While there were certain items always required in order to get a conventional mortgage, the amounts, or qualities of those items increased, or decreased according to demand or other financial indicators. The downpayment is the most common standard requirement. The down payment requirements now are much stiffer than they were prior to 2006.


The downpayment is a classic mortgage requirement. In general a conventional mortgage will require a downpayment of 20%. That's about 10% higher than usual in the pre-crisis era. Even higher that 10% for the many subprime loans given by banks between 2000 and 2006. Often many of those loans were less than 1% or no money down loans. When the economy and mortgage crisis caused severe downturns, and the housing market plummetted, those low or no downpayment loans were suddenly "underwater," meaning worth less than their outstanding loan.

How to Lower Downpayment Requirements

There are ways to lower a downpayment if you are eligible for certain programs such as a HUD home that has a downpayment of 2.5%. Another way to get a lower downpayment requirement is to accept a higher interest rate. However, over the long run that is much more expensive. Both options are risky in case the market falls again where you could find yourself owning more than the house is worth. Improvement in the overall market may, over time, result in lower down payment requirements.


Source of the downpayment is a long-time issue with banks, but is even more of a focal point now. Banks prefer to see a strong habit of saving and ability to build up your own reserves, so the more money you come up with from savings for a downpayment vs. gifts from friends or relatives the better it will look for your application.