We’ve seen this before but, for now, good news for some borrowers – and what could possibly go wrong?

We don't know, but whatever it is, we'll do it

We don’t know, but whatever it is, we’ll do it

Banks lowering down payment deposits to as low as 3%

Even jumbos are dropping from 20% to 15% and even 10%.

WSJ: It is getting easier for some buyers to land a house with less money up front.

More lenders are lowering down-payment requirements, allowing borrowers to commit 3%—or even less—of a home’s purchase price to get a mortgage. Most had been requiring down payments of 20% or more since the recession began, with a few exceptions.

Some lenders also are waiving mortgage-related fees, and more are allowing down payments to be made by other parties, such as the borrower’s family.

The deals are aimed at buyers with good credit scores and a steady income who have been unable to save enough for a sizable down payment. They are often targeted at buyers who live in expensive housing markets, where even a small down payment can equal tens of thousands of dollars.

The trend toward lower down payments has picked up since mortgage-finance giants Fannie Mae and Freddie Mac , which buy most mortgages from lenders, recently lowered the minimum down payments they will accept to 3% from 5%. The changes are driven by an Obama administration effort to make homeownership affordable to a wider group of buyers.

Borrowers should be aware that small down payments leave them more at risk of owing more on their mortgage than the property is worth should home values in their market decline, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla. In addition, borrowers likely will incur higher costs over the life of the loan, including higher interest rates and, often, mortgage insurance.

TD Bank, the U.S. unit of Toronto-Dominion Bank , is allowing first-time buyers to put as little as 3% down through its “Right Step” loan program. The bank—which also is extending the offer to low- and moderate-income borrowers as well as those purchasing a home in some up-and-coming neighborhoods—lowered its cash-down requirement from 5% last year.

The banks allow borrowers’ down payments to be partially or fully funded by family, nonprofits or other sources.

Lenders also have been lowering the bar for large mortgages, known as ”jumbos,” which they typically hold on their books. Such loans exceed $417,000 in most parts of the country and $625,500 in pricier housing markets such as New York and San Francisco.

In November, PNC Financial Services Group began allowing exceptions to its down-payment requirements for jumbo mortgages, says Tyler Case, a loan officer at PNC’s Fords, N.J., branch. The lender, which has been requiring at least 20% down for jumbos up to $1.5 million, lowered that to 15% for borrowers whose income and assets go beyond what the bank generally requires. To qualify, borrowers will need a higher credit score and less debt relative to their income than is usually required, as well as having savings after the home purchase equal to at least 12 months of mortgage payments.

PNC also is offering exceptions on down-payment amounts for larger loans up to $3 million.

Wells Fargo , meanwhile, began permitting down payments of as little as 10.1% last year on jumbo mortgages. Previously, its lowest down payment on jumbos was 15%.



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11 responses to “We’ve seen this before but, for now, good news for some borrowers – and what could possibly go wrong?

  1. Cos Cobber

    Big mistake. 20% down is a tremendous built in hedge to the entire fed reserve lead banking system. Talk of banks having to up their capital ratios should also extend to all homeowners – at least at the time of initial house purchase.

  2. Winair Co- Pilot

    Who is offering jumbo loans at competitive rates with less than 20% down?
    A jumbo loan typically requires 30% down, or did so 18-24 months ago if you wanted the lowest rate on a 30 yr fixed.

  3. Winair Co- Pilot

    Insanity. But good for local real estate, I guess I’ll just enjoy the ride.

  4. Publius

    Ironic that Dodd Frank has squeezed a lot of banks out of certain segments of the market which has led same banks into real estate lending, both commercial and residential as if this is something without risk. In the pre-crisis 2008 era banks made similar loans with encouragement from policy makers and overseen by the various and sundry government regulators. As we know it did not end well. Not only did it not end well, but the very same policymakers and regulators who cheered on these loans and oversaw the banks that made them, turned around and sued them (extorted really) for billions and billions of $$$$’s for making bad loans, AND they are still extorting 7 years on….

    I will concede that banks are dumb and they need to make money, and making these loans in the short run will make money, BUT why would any bank management wade back into this morass while settlements and lawsuits are still hanging over the industry. If you can’t buy a house with these incredibly low rates and in many cases prices that are only bumping along the bottom without these low hurdles, YOU ARE NOT QUALIFIED TO BE A HOMEOWNER AND YOU SHOULD NOT BE BUYING A HOUSE. Pay off your 6 figure student loans and stop sticking the tax payer with all this crap!!!

  5. Anonymous

    The problem is that borrowing practices have completed distorted the market. The “rule” used to be that mortgages should only be, at most, 2.5x your gross salary. So for a $1mm house with 20% down, you’d need at a bare minimum gross income of $320k. Today in Greenwich the median home value is 13x the median income. And 2.5 times that median income is a shocking $312k–meaning a person with a median income in Greenwich could only qualify to buy a $375k house under the old rule. That doesn’t even exist in Byram. Obviously these figures don’t translate perfectly by any means, but clearly something’s out of whack. Home values rise when lending restrictions loosen–2008 proved that. So it’s pretty much impossible to find decent, safe housing AND be financially conservative–especially since rental rates are rising–anywhere near a major metro area, unless you’re making at least $500k/year. And that’s less than 1/2 of 1% of people.

    We need to significantly tighten lending restrictions–something like the 1960s, when you could borrow no more than twice your income, or less. This would utterly destroy home values in places like Old Greenwich where there’s been tons of turnover lately and where prices have been rocketing due largely to Yuppies with kids living beyond their means. It would also hurt brokers, since their commissions are based on sales price. But it would stabilize the market significantly. Also, we should eliminate personal bankruptcy. That would discourage risky borrowing practices, both for personal credit and home lending.

    • Anonymous

      The reality is 2.5x gross would decimate banks, Freddie/Fannie, other agencies, and the millions of people whose livelihood depends on real estate and anciliary services. Lending would atop amd prices would plummet. Elected officials won’t like that so much….

      Ironic that for decades and decades the rate of appreciation for RESIDENTIAL real estate closely tracked treasuries. Somewhere along the way, circa mid late 1990’s, things went bonkers when people thought RESIDENTIAL real estate, a.k.a. one’s HOME, is somehow supposed to gain in value at a rate comparable to risky investments…..

      • Anonymous

        I agree that’s the reality, but as our technocrat overlords would say, it’s time for a disruption. People say that individual borrowers need to practice self-restraint in borrowing, but it’s almost impossible for upper-middle-class people to find a reasonable house in a safe, good school district that’s in a major metro area without overextending themselves. This can’t stand.

        • Anonymous

          Disruption will only benefit the extremely wealthy.
          They will scoop up all the homes that get foreclosed on due to the loss of wealth, income, and equity.

          It’s just like when the market as a whole corrects like it did by roughly 60% a few years ago…the big money was long gone before it ever sniffed those ultra lows, but when the lows set in, back came the big bucks, in droves, buying equities for 10 cents on the dollar, and their previously losses of maybe 20-30 percent became buying opportunities that would 5-10x their portfolios over the next 5-6 years.
          Trust me, crashes only BENEFIT the wealthy.
          Their money moves first, swiftly, and quietly, and the rest get left holding the bill.
          Think Amex @ 12 dollars, now 84
          Think Apple @ 8 dollars, now 112
          Or Netflix @ 35, now 420+
          Big money makes those move.
          If the market tanks, their electronic sell limits kick in, they lose a few pennies, you and I ride it all the way down.
          They swoop back in, buy the dip, and cash in all over again.

      • Publius

        It went bonkers in the mid 1990’s primarily because that is when lending standards, egged on by the political class started the long decline. Additionally the tax law changed in 1997, I believe, that excluded gains from taxation on sale (250k/500k) and this allowed home owners to flip and trade up with no federal tax hit.

  6. Peg

    Will we ever learn? Apparently not.

    Why do so many seem to not comprehend that the short term gain of a bull real estate market can translate to acute pain – for homeowners AND Realtors – by these “get rich quick” concepts.

    You just haven’t lived until you’ve sat at a table with someone who has lost their life’s savings due to a collapsing real estate market. I have – and my desire to repeat it is zero.

  7. taxarbitrage

    If Greenwich required all home purchases to be 100% cash, this would help keep out the riffraff borrowers and we would have a much better community!