20 Percent Down Payment May Not Be an Indicator of Ability to Pay

20 Percent Down Payment May Not Be an Indicator of Ability to Pay

A recent New York Times article, Down Payment Rules Are at the Heart of the Mortgage Debate, discusses the current debate on whether first time home buyers should put down the standard twenty percent.

One the “yes” side, regulators and policy advisers want to prevent another financial meltdown – as well as help prevent foreclosures. Requiring buyers to put down 20 percent means that people are “invested” in their homes and less likely to walk away.

On the “no” side are lenders and consumer advocates who believe that the standard 20 percent restriction could prevent lower-income buyers from entering the market.

Does putting down the standard 20 percent help buyers – or hinder them? The answer depends on a number of factors, including borrowers’ financial literacy and their debt to income ratio.

Financial literacy lowers probability of foreclosure

NeighborWorks® posted the results of a study that showed pre-purchase counseling and education works. Using information from approximately 75,000 loans that originated between October 2007 and September 2009, Neil Mayer and Associates and Experian analyzed the impact of pre-purchase counseling and education on borrowers.

NeighborWorks clients who received counseling and education were one-third less likely to become 90+ days delinquent over a two year period after receiving their loans than borrowers who did not receive counseling and education.

For people who understand the ins-and-outs of the mortgage process, budgeting money and handling credit, a 20 percent down payment may not be necessary – a point made clear in another study.

As explained in the NY Times article cited above, Professor Quercia of the University of North Carolina found that he had to exclude more than half the borrowers from his study on whether a 20 percent down payment resulted in fewer defaults. Those that were excluded from the study hadn’t put down the 20 percent – but they hadn’t defaulted, either.

People with little debt may not need a high down payment

Debt payments include car loans, student loans, personal loans and credit card loans – plus the total mortgage payment, including principal and interest, PMI, homeowners dues, etc. (To calculate your debt to income ratio, use FHA’s Mortgage Calculator.)

For a single person or couple who is debt-free but just starting out, a 20 percent down payment could be restrictive – and prevent them from getting into a home now while rates and prices are so low.

Call Meridian Home Mortgage to discuss your situation

Whether you’re a first time homebuyer with zero debt and little savings or relatively high debt, we can help you find a loan program that suits your situation.

You may be eligible for an FHA loan, a loan assistance program, or a loan requiring zero financing or 3.5 percent down. And, many programs allow for family gifts and generous seller contributions to help with closing costs.

With the housing industry stabilizing, prices steadily climbing (but still significantly below 2006 prices) and 30-year fixed mortgage interest rates still below four percent, now is a great time to buy your first home.

Call us today ( 877-878-0100 ) to see how you can make any one of these programs work for you.