Do Mortgage Down Payments Matter?
I recently read and article about low down payments loans and are they a primary reason for loan defaults. Immediately you would think that if someone put down a 20% downpayment that the chances of them defaulting are pretty slim. Well that’s not always the case.
The study seemed to indicate that the type of loan and where it was originated contributed more towards defaults. Adjustable Rate Mortgage and loans that were originated by Brokers appeared to lead to higher defaults.
While I can see that adjustable rate mortgage being a higher risk, just because a loan was originated by a Broker does not seem to correlate to a higher default. What the study fails to point out is that man of these adjustable rate mortgages were also known as “subprime loans”. They were made to borrowers with weaker credit, lower cash reserves, and questionable incomes. Most of these were originated through the Broker channel because that is where the products were offered.
Many Banks did not want to tarnish their image by originating these loan types so they put them through the Broker origination channel only to buy them after they closed. They couldn’t get enough of these higher yielding products. As the demand grew, the underwriting standards fell and weaker and weaker borrowers were approved.
So do low downpayments lead to higher loan defaults? I would that while they carry a larger risk exposure for the lender in case of a loss, the amount of downpayment does not make it more likely for default. I think that borrowers desiring to use a low down payment option should be help to a higher standard.
Things like:
- No Bankruptcies or Foreclosures EVER
- No charge offs on any major account like car loans, student loans, credit cards
- Medial collections paid, period
- Debt Ratios: 35% max
- No more than 2×30 on all accounts w/in the last 2 years
- Savings of at least 10% or more of the purchase price after paying downpayment and closing cost with a history of saving it. No sudden wealth due to gift or mysterious deposits. They must show a pattern of saving.
The last one is probably my favorite. I believe that many of the defaults happened not because the borrowers didn’t have any “skin in the deal” but more because when issues arose they had no way to deal with them. Repairs, maintenance all cost money and if you have no savings then you have to either finance it or you can’t pay it. If you lose your job and have no savings, you default.
Some may feel that this does not promote homeownership of that only the wealthy will be able to own a home. I disagree. If you can’t meet the standards then maybe you should rent or learn how to budget and save. What it promotes is responsible homeownership.
See the original post here:
Do Mortgage Down Payments Matter?
