There have been two noteworthy developments in recent weeks, where mortgage down payments are concerned. They will affect borrowers who are shopping for a home loan in 2015. In light of these recent developments, we thought it was time to publish an update on the subject. Here’s what borrowers should know about mortgage down-payment requirements in 2015.
Let’s start with the new developments mentioned earlier. They are both potentially good news for borrowers with limited funds for an out-of-pocket investment.
- Item 1: For the last three years, a proposal for a standard 20% down-payment requirement has loomed over the mortgage industry like a dark cloud. But that proposal has now been officially nixed by government financial regulators.
- Item 2: Meanwhile, the government’s top housing agency recently announced that Fannie Mae and Freddie Mac may start buying loans with 3% down payments. That means lenders could be more inclined to offer such loans going forward.
Here’s an in-depth look at these two developments, and how they might determine down-payment requirements in 2015.
Federal Agencies Ditch 20% Down-Payment Proposal
In 2011, when federal banking regulators were first sketching out their new rules for the lending industry, they proposed a 20% down-payment requirement for all mortgage borrowers. Technically, it wasn’t a hard-and-fast requirement. They merely proposed to include the 20% criteria into their definition of a Qualified Residential Mortgage (QRM).
The QRM rule requires mortgage lenders to retain a certain percentage of the loans they generate, whenever those loans fall outside of QRM parameters. In other words, it would have given lenders a strong incentive to impose the 20% down-payment requirement on borrowers.
I’ve been saying for a long time that this proposal wouldn’t fly. It encountered too much resistance from too many groups — Realtor associations, mortgage lobbyists, consumer advocacy groups, Congress, you name it.
And now it’s official. The FDIC, one of six federal agencies finalizing the QRM rule, recently announced that the 20% down payment stipulation would not be part of the final rule. This gives lenders the ultimate decision-making authority, at least where loan-to-value ratios are concerned.
It bears repeating: There will not be a government-imposed 20% down-payment requirement on mortgage loans in 2015. It was proposed in 2011. It met with a firestorm of opposition. And it has since been dropped off the docket. On to the next issue.
Fannie and Freddie Might Start Buying Loans With 3% Down
Fannie Mae and Freddie Mac are the two major players in the secondary mortgage market, where mortgage-backed securities (MBS) are bought and sold. In short, these government-controlled corporations purchase home loans and then sell them to investors. They also establish certain guidelines and limitations for the loans they are willing to buy. A loan that meets these guidelines is said to be “conforming.”
According to a recent announcement, Fannie and Freddie are now considering loan products and programs that would allow for a 3% down payment in some cases.
This is big news — or at least, the possibility of big news. Here’s why:
Last year, Fannie Mae stopped acquiring mortgage loans with 3% down payments, except in a few limited circumstances. Freddie Mac stepped away from them years ago. Both agencies currently set the bar at 5% or higher, as far as down-payment requirements go. So the 3% acceptance would be a major policy shift that could increase credit access for borrowers in 2015.
Melvin Watt, director of the Federal Housing Finance Agency (which oversees Fannie and Freddie), spoke about these proposals at the Mortgage Bankers Association’s annual convention in October. Here is part of what he said:
To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent. Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account “compensating factors.”
He added that additional details would be forthcoming over the next few weeks. So we should soon know what kind of borrowers fall into this “targeted segment.” Some have speculated that the 3% down-payment option will be limited to first-time home buyers in particular. But Mr. Watt did not give any indication of this.
FHA Requirement to Remain at 3.5% in 2015; VA Still at Zero
The proposals and changes mentioned above apply to conventional homes in particular. A conventional loan is originated (and sometimes insured) from within the private sector, without government backing or guarantees. This distinguishes them from government-insured lending programs, such as the ever-popular FHA and VA loans.
In 2015, the minimum down-payment requirement for an FHA-insured mortgage will remain at 3.5%, where it has been for the last couple of years. The Department of Housing and Urban Development (HUD) has given no indication that it plans to change that requirement.
VA home loans, on the other hand, allow qualified borrowers to buy a house with no money down whatsoever. The program offers 100% financing to eligible military servicemembers and their families.
So this is where we are right now, in terms of mortgage down-payment requirements in 2015. We will be following the 3% story closely, and will publish updates as needed to keep you informed on the subject. (You’ll hear it from other sources as well. If Fannie and Freddie begin purchasing loans with a 3% down payment, it’s going to be headline news.)