Federal regulators voted this past Tuesday to not require a 20 percent down payment from borrowers as long as the loans lenders made followed certain guidelines, those set for in the “qualified mortgage” rule. Not only that, at the same time Fannie Mae announced they will introduce a loan that only requires a 3.00 percent down payment, 2.00 lower than the current 5.00 percent minimum. Almost immediately there were howls from consumer groups the changes weren’t enough. Or too much, depending upon who yelled the loudest.
The fact is the down payment requirement isn’t the only factor when approving a loan. The Consumer Financial Protection Bureau, or CFPB, has been threatening to require at least a 20 percent down payment, as if that will protect the public from having to rescue lenders once again. But we’re not sure what these groups are missing. If a hefty down payment is protection from foreclosure, then why in heck are VA loans the highest performing in the industry?
If conventional lenders applied some of the guidelines VA lenders use to approve loans they might have the same sort of rating. For instance, why not check a household’s residual income, the amount of funds left over each month after taxes, withholdings, bills and such? All of this noise about a borrower not having any “skin in the game” is really nonsense when the loan makes sense. If the borrowers have good credit, steady income and can afford the monthly payments, why make anyone pay 20 percent down? Maybe for those with questionable credit or spotty income, but for a standard borrower it doesn’t make sense. Seems if conventional lenders applied some of the VA “common sense” guidelines, much of the housing crisis could probably have been avoided.