20 Percent Down Payments Required?

by UrbanTurf Staff


The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency are all supporting a proposal that will require home buyers to put a minimum of 20 percent down in order to obtain a “qualified residential mortgage”, The Wall Street Journal reported this morning.

In addition to the three agencies that already support it, the proposal must also get the go-ahead from the Department of Housing and Urban Development, the Federal Housing Finance Agency and the Securities and Exchange Commission, so whether or not it moves forward is very uncertain.

It is not clear how a “qualified residential mortgage” will be defined, but the article notes that regulators must issue a definition by April. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the sweeping financial reform legislation signed into law last July, a “qualified mortgage” is defined as a mortgage with:

  • No negative amortization (when the payment made by the borrower is less than the interest due and the difference is added to the loan balance)
  • No large balloon payment (a large balance that comes due at the end of the life of a mortgage)
  • Verification of Income (VOI) and Verification of Assets (VOA)
  • A debt-to-income ratio based on a fully-indexed rate
  • Total points and fees not in excess of three percent of the loan amount
  • A maximum loan term of 30 years

What is interesting is that banks across the country already seem to be requiring 20 percent down payments on conventional loans. In mid-February, an analysis for The Wall Street Journal by Zillow.com revealed that the median down payment in nine major U.S. cities rose to 22 percent last year on properties purchased through conventional mortgages. That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997.

This article originally published at http://dc.urbanturf.com/articles/blog/20_percent_down_payments_required/3085


  1. Emil said at 4:14 pm on Wednesday March 2, 2011:

    This is good news! Although Bank and Fannie guidelines should be adjusted to for the VOA and VOIs because many people have unique situations.

  1. Wendy said at 5:41 pm on Wednesday March 2, 2011:

    Very good news.  If you don’t have the financial discipline to put 20% down, maybe home ownership isn’t the best option.

  1. jag said at 6:00 pm on Wednesday March 2, 2011:

    I certainly agree that stricter financial discipline is needed and I personally have been saving my 20% down, but the pendulum definitely seems to be swinging too far. 20% just isn’t possible for most in their 20s and even into their 30s if they have spent their time and money obtaining advanced degrees. 20% is also near impossible in areas like DC where being middle class, college educated, etc. isn’t enough because the cost of living is so out of whack.

    Taking home ownership away from the middle class and those who pay for their own education, rather than relying the wealth of their parents, is a very unhealthy approach that’ll only help foster the increasing number of “have nots” in this country. Focus on debt/income ratios, not previously accumulated silver spoons.

  1. Rob said at 6:10 pm on Wednesday March 2, 2011:

    @jag: Part of the reason that the cost of living is so out of whack in areas like DC is that it has been so easy to get mortgages.  Higher down-payment requirements will likely lead to lower real-estate prices—so the net effect on affordability will be pretty small.

  1. Mike said at 6:13 pm on Wednesday March 2, 2011:

    I think fiscal risk management is a good thing, but I also worry a bit about the pendulum swinging too far over. It makes sense to have a better formula that considers debt/income ratios, down payment, market trends (e.g., DC market is seeing appreciation, most other places are not), credit ratings,etc.  To blanket 20% for the best terms will cut out a lot of otherwise eligible and good risk bets. To be fair, I’m sure banks will offer other options, like higher interest rates and PMI to reduce their risk price, but this will make it hard on many first time home buyers who are otherwise well qualified.

  1. 20 percenter said at 6:19 pm on Wednesday March 2, 2011:

    I recently purchased a home in a more upscale part of Silver Spring, and I put 20 percent down.  I received no help from family or friends; it was money that I earned and saved from over 14 years of working.  This is my first home purchase ever. 
    I waited because I moved a lot from one city to another; the longest I ever stayed in a city was 5.5 years.  Usually, I stayed 2-4 years and then moved.  But more importantly, I found that the prices in the DC area—even during the housing “bottom”—were high for what you get.  Maybe that’s another reason why I’m a first time home buyer at 38 years old.
    Oh, and I am one of those professionals who had to pay off my law/med school loans first, and then get a modest car.
    The prices in the DC area are geared towards two upper income earners.  Sort of ironic for a town full of government workers and many young singles.  Pretty soon, DC and the surrounding area will be like NYC—totally unaffordable, with many people living in apartments for life, or moving away to some place more affordable.

  1. ossipago said at 9:21 pm on Wednesday March 2, 2011:

    What’s wrong with living in an apartment for life? Home owning is not a right, it’s a privilege. And it does not always work as a forced savings account - people often can end up in a much worse financial position after buying. As long as people can afford rent, housing will still be by definition affordable.

  1. jag said at 10:56 pm on Wednesday March 2, 2011:

    “people often can end up in a much worse financial position after buying.”

    I think “often” is a pretty big exaggeration, unless you’re just looking at the past couple years and ignoring the previous 60.

    “Home owning is not a right, it’s a privilege.”

    I’m fine with that statement, but we as a society shouldn’t continue subsidizing home ownership if the barriers to that ownership prevent large swaths of society from having the opportunity to own property. If property investment is reserved for those who can raise the capital, then treat it like any other investment and stop subsidizing it.

  1. David said at 11:25 pm on Wednesday March 2, 2011:

    20% is a reasonable expectation if you’ve already got equity in a home, but I would hate to see the lower-downpayment FHA loans for first-time homeowners disappear. What young person can save up $40K+ for a downpayment with no help from mom and dad? I never could have gotten into the market in 2008 without the FHA first-time buyers program. Their 3.5% minimum downpayment is probably too low, but 20% isn’t feasible.

  1. ossipago said at 12:17 am on Thursday March 3, 2011:

    “If property investment is reserved for those who can raise the capital, then treat it like any other investment and stop subsidizing it.”

    I agree. I am all in favor of ending the mortgage interest deduction, for instance, and letting housing making the adjustment for the end of subsidization.

    “What young person can save up $40K+ for a downpayment with no help from mom and dad?”

    I don’t see what the problem with this expectation is. Many people can do this, while saving for retirement - if they live below their means. Even in DC. Even on nonprofit salaries. Which means the young lawyers, doctors, and financial analysts definitely can, if they are willing to make appropriate sacrifices towards this goal.

  1. FCResident said at 7:08 am on Thursday March 3, 2011:

    I’m for higher down payments, primarily because it rewards those whose (generally speaking) work hard, live beneath their means, save, and in my opinion, earn the privilege to buy a home. 20 percent is not asking too much, even if it means a person has to save for 15 to 20 years after college to purchase a home. My grandparents didn’t but their first home until well in to their late forties, and they bought it in cash. While this is an extreme example, I think it’s indicative of the frugality many Americans have lost. I have been saving now for six years (in my mid-30s) after graduate school and am halfway to a decent 25 percent down payment within the next five years. I don’t see why this is an issue.

  1. Pat said at 12:16 pm on Thursday March 3, 2011:

    @ossipago: “I am all in favor of ending the mortgage interest deduction…..”

    Are you serious?  I do not think this would be beneficial to hard working people who own their own homes and pay their mortgages every month.  Tell me what the benefit is - maybe I’m missing something?

  1. Calling John Galt said at 12:23 pm on Thursday March 3, 2011:

    I am very happy to see that most of the comments are for the increase.  I too think that homeownership is not a “right”.  Many of you are concerned that affordability of homeownership in our area is out of reach for the masses and it is.  It is out of reach BECAUSE the masses have been buying and driving demand although it was being subsidized and forced by regulators through the Community Reinvestment Act which forced lenders into lower down payment loans.  If the market is corrected by removing the subsidy (and eliminating the huge risk of default for all of those low down payment loans that the rest of us will have to carry) then there is no question that the law of supply and demand will correct pricing in our area as demand will surely fall thus driving up supply and making the market more affordable to more people (but thankfully not the masses).  We can only evade realty for so long and at some point will have to face it; homeownership is not for all and is most definitely a privilege for those who are disciplined and earn that privilege.  I might add that the government backed loans are not the only ones out there.  There are still banks that will lend on portfolio and may be willing to risk a lower down payment loan for an individual who proves that they are deserving of it.  The demand for those loans will surely be high and so someone out there will have to meet that demand.

  1. jag said at 1:53 pm on Thursday March 3, 2011:

    Pat, the mortgage interest deduction costs the government about $90 billion dollars a year and that’s only one of many government subsidies of home ownership. If home ownership is just a “privileged” that’s reserved for those of us wealthy enough to enjoy it, then obviously it’s completely absurd for the government to subsidize us. It’s insane what people feel entitled to once they have a taste.

    I work hard to build my stock portfolio too - should I demand that the public subsidize that investment as well? No, of course capital gains taxes should be paid, just like they should for profits made on a home sale.

  1. StringsAttached said at 2:38 pm on Thursday March 3, 2011:

    Great discussion!

    I’m approaching this from a purely economical sense. Requiring 20% down and/or repealing the mortgage interest deduction are two things our economy cannot handle. We are already facing a long recovery and enacting any one of these changes will make it even worse. There is nothing wrong with 20% down if you can afford it but I heavily disagree that it is the magic number. Why no 50%, 30%, or 81% down? Being able to afford a mortgage and the responsibility of owning a home is a mix of many things besides putting up 20% and such a rule would keep people out of the market who could own a home comfortably. I am a 24 year old who recently purchased in SE (yes, the other side of the river) and given the prices in the DC area I can tell you that my wife and I would have continued to rent. We went FHA and parents helped us. Because I live in the neighborhood, I’m now involved and volunteering in ways that I don’t think I would have if I continued to rent in Alexandria. My wife (21) is finishing up her undergrad and I am working on my graduate degree and CPA designation. We are very hard working and will pay back the money used to help us get the mortgage. We could have kept renting, paid the same amount as we are for the mortgage, and not be involved in our community. Home ownership is a good thing for those who can afford it…I don’t think 20% down is really the end all be all.

  1. Calling John Galt said at 2:59 pm on Thursday March 3, 2011:

    Strings you bring up a good point which makes me realize a flaw in my earlier comment.  I agreed with the 20% down when clearly I shouldn’t have.  The government should be out of this business altogether and not regulate at all (any required arbitrary) down payment.  The private sector i.e. lenders should decide what is best for them.  If they want to underwrite someone with only 3.5% down let them do so at their own peril.  I bet big money that there would be loan types of every kind provided to all sorts of buyers if loans were not packaged, insured and sold to and by the government.  They’ve screwed this market up so badly already that the fix -if its them that fixing- will only create yet more damage.  If the banks could not sell the loans to FHA or Fannie and had to underwrite and find the investors to buy the loans they serviced they would be very prudent in whom they gave money to because it’s their necks on the line.

  1. oss said at 4:25 am on Friday March 4, 2011:

    The mortgage interest deduction primarily helps the upper middle class and rich anyways, the people who need it least. It’s worth more to them, since they pay higher marginal tax rates; they get more out of it, since they are likely to take out higher loans; and they are much more apt to make use of it fully, since they are likely to exceed the standard deduction amount with OTHER deductions.

  1. ossipago said at 4:36 am on Friday March 4, 2011:

    The post above was me again, don’t know why my user name got cut off.

    At John Galt: Home ownership is not always a good thing, even for those who can afford it. It limits mobility, for instance, one of the big problems right now when unemployment is high and people are tied to underwater mortgages. Also, buying almost always gets you less than renting something for the equivalent price, so it does have lifestyle costs.

    I’m all for community involvement, but I suspect that the reason renters get involved less is complicated. Part of it is no doubt because they are treated like second-class citizens in a community just for being renters. Take Georgetown and Tenleytown and the conflicts there between homeowners and the universities. Owners in many places seem to quickly devolve into NIMBYs who oppose any changes to their neighborhoods.

  1. Ashley said at 11:25 am on Friday March 4, 2011:

    What I find amusing is that no one seems to be discussing the fact that renting in DC is not affordable either.  If there are less people capable of buying that is just going to push more people into the already limited supply of rentals making living in the district, or not too far outside of it, impossible for anyone not making over $100K a year.

  1. Rob said at 2:50 pm on Friday March 4, 2011:

    @Ashley: You might want to dial back the hyperbole a bit.  Yes, DC is expensive, but it’s utterly ridiculous to claim that renting is impossible if you make less than $100K/year.  Median household income in DC is well under $100K.

  1. Ashley said at 3:38 pm on Friday March 4, 2011:

    @Rob, I was exagerating some, but honestly not that much.  I like many in my situation have student loan debt, and a small amount of credit card debt on top of housing and other expenses.  I can definitely rent in DC, as long as I continue to live with others.  I am in my late 20s and have furniture already, group housing really isn’t practical for me at this time.  If I want to live alone I would need to pay close to half of my take home pay to be able to afford it.  Take out another quarter for debt repayment (college was expensive) and then what is left would be just enough to pay my remaining expenses.  I wouldn’t be able to pay any more towards my debt than the minimum and thus would not be able to get out of debt or start saving for the 20% down that was being discussed.  I don’t think my statement was ridiculous, in my case and many others I think it is the case with living in DC.

  1. ossipago said at 4:10 pm on Friday March 4, 2011:

    @ Ashley: You are trying to have your cake and eat it too. You chose to go to an “expensive” college and run up other debt. You can afford housing in DC, but it doesn’t meet your lifestyle preferences. That doesn’t make DC housing unaffordable. I lived in Dupont on 40K, alone, comfortable, so 100K is a HUGE exaggeration even with student debt service.

  1. Ashley said at 6:11 pm on Friday March 4, 2011:

    @ossipago, Can I ask how much you you pay in rent, based on my research I haven’t seen anything a person making $40K could afford in Dupont according to most rental companies rules (gross income should be at least 30 or 35x the monthly rent).  Also I am not trying to have my cake and eat it to.  College is expensive and to get a good job now days you need to go.  My parents weren’t able to pay for it so I am now paying for it.  I am looking for a place that is metro accessible and is a place I can afford.  As I mentioned earlier the places I have found are areas I don’t feel safe living by myself, my safety isn’t something I should compromise on.  Maybe I am being picky, maybe I do need to spend half my income to be able to live alone in DC, but I feel that that is a little ridiculous.

  1. Mike said at 11:05 am on Monday March 7, 2011:

    Actually median DC household just crossed 100k, although the mean is a bit lower. 

    I’m for a phase out of the mortgage interest deductions over time vs. all at once, therefore allowing the market to adjust gradually (perhaps over a 5 year period were deductions are rolled back 20% per year).  Or maybe a stronger cap on deductions based on price of home, maybe $500k or more.  I’m against doing it by earnings though, as this punishes the frugal.  But government should be out of this business that is inflating house prices, particularly at the higher end of the range.  Realistically the deductions at the lower end don’t make that much difference. At minimum, I’d eliminate it for non-owner occupied homes.  It seems crazy to allow interest deductions for people’s vacation homes.

  1. StringsAttached said at 1:55 pm on Friday March 11, 2011:

    First, I have to agree with @Ashley in her comments. SURE, she could live in SE and be fine but safety is worth far more. DC is expensive but I don’t know what can really be done about that. As far as metro is concerned, everyone “wants to live by metro” so that will always drive up rents. I had to buy a vehicle due to the part of DC we chose to live in; I figure I will either have to pay for a car or higher rent.

    As far as the mortgage interest deduction goes, if that were to be repealed I would immediately sell my house and rent as the total cost of owning would mostly likely exceed the cost of renting.

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