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Requiring Large Down Payments on Mortgages Alienates Millennials
By CJ Moore
May
03
2011
When it comes to housing and mortgages, logic has not been part of the equation for the last 20 or so years.
Why do we have so many homes that are underwater and so many foreclosures? Well, Americans wanted the biggest house they could afford (or thought they could afford); lenders were willing to give out loans like Happy Meal toys; and the combination has produced a system that needs to be fixed.
Unfortunately, the government’s plan for fixing the mess is just as flawed as the buy-beyond-your-means era. By pushing for mortgage loans only given to those who can put down 20 percent, the government and mortgage industry will unfairly alienate a new group of capable homeowners, the Millennials.
I feel strongly about this because I am one of those potential capable homeowners. I’m 26. I’m employed. I’m not married, but I’ve started to think about a family and started to think about owning a home. I’ve been out of college for four years now and had a full-time job for most of those four years; yet for me to even think about putting 20 percent down on a home is preposterous.
Even though I’ve been conservative with my spending throughout my adult life, I have not saved enough for that kind of down payment. And I live in Kansas City, an affordable city compared to most major metropolitan areas. Homes in the area where I would want to live and send my future kids to school range from $125,000 to $200,000, and those are what many would consider starter homes.
So let’s say I want to buy a $125,000 home, a 20 percent down payment would cost $25,000. The National Association of Homebuilders says that it would take a family earning a median income 14 years to save a 20 percent down payment on a new home, and that figure is pretty close to what I estimate it would take me to put aside that much money.
Now, I have always paid my bills on time, never fallen into debt and never been a big spender. As I said, I’m conservative and careful with how I spend my money. Why should I not have the opportunity to own a home? Just because I cannot afford a big down payment does not mean I would not pay my mortgage.
In fact, according to government data on loans made from 1997-2009 (read the Washington Post story about it here), credit history was a much better indicator on a homeowner’s ability and willingness to pay a mortgage than how much someone put down for a down payment.
According to the data, qualified borrowers with strong underwriting standards who made small down payments defaulted at 2.3 percent, which was about twice the rate of borrowers who met the same standards but put down 20 percent. However, the more telling number was this:
The default rate for borrowers with a poor history of paying their bills on time – those who put down 20 percent included – was 4.7 percent.
I hope the government and those providing mortgages take a closer look at this data and start to rework their qualifications for who they think is best qualified to own a home. I can see their logic. Bigger down payment equals a homeowner who has more invested in the house and is less likely to just walk away. But as the data proves, it is more important that homeowners feel it is their duty to pay their bills and be accountable.
I have no problem with making it more difficult to own a home for people with a poor credit history. We need to change, because what was going on before – giving anyone with a pulse a mortgage loan – was not working. But do not punish my generation for the mistakes of older generations. I like to think I’ve learned from their mistakes. I will not spread myself too thin by reaching and buying a house that probably isn’t in my price range. I’ll wait to buy a home until I know I can afford the monthly mortgage payment and will have enough for the many other costs that come with owning a home. I just hope I won’t have to wait 14 years longer than when I’m ready because of the down payment requirements.
Why do we have so many homes that are underwater and so many foreclosures? Well, Americans wanted the biggest house they could afford (or thought they could afford); lenders were willing to give out loans like Happy Meal toys; and the combination has produced a system that needs to be fixed.
Unfortunately, the government’s plan for fixing the mess is just as flawed as the buy-beyond-your-means era. By pushing for mortgage loans only given to those who can put down 20 percent, the government and mortgage industry will unfairly alienate a new group of capable homeowners, the Millennials.
I feel strongly about this because I am one of those potential capable homeowners. I’m 26. I’m employed. I’m not married, but I’ve started to think about a family and started to think about owning a home. I’ve been out of college for four years now and had a full-time job for most of those four years; yet for me to even think about putting 20 percent down on a home is preposterous.
Even though I’ve been conservative with my spending throughout my adult life, I have not saved enough for that kind of down payment. And I live in Kansas City, an affordable city compared to most major metropolitan areas. Homes in the area where I would want to live and send my future kids to school range from $125,000 to $200,000, and those are what many would consider starter homes.
So let’s say I want to buy a $125,000 home, a 20 percent down payment would cost $25,000. The National Association of Homebuilders says that it would take a family earning a median income 14 years to save a 20 percent down payment on a new home, and that figure is pretty close to what I estimate it would take me to put aside that much money.
Now, I have always paid my bills on time, never fallen into debt and never been a big spender. As I said, I’m conservative and careful with how I spend my money. Why should I not have the opportunity to own a home? Just because I cannot afford a big down payment does not mean I would not pay my mortgage.
In fact, according to government data on loans made from 1997-2009 (read the Washington Post story about it here), credit history was a much better indicator on a homeowner’s ability and willingness to pay a mortgage than how much someone put down for a down payment.
According to the data, qualified borrowers with strong underwriting standards who made small down payments defaulted at 2.3 percent, which was about twice the rate of borrowers who met the same standards but put down 20 percent. However, the more telling number was this:
The default rate for borrowers with a poor history of paying their bills on time – those who put down 20 percent included – was 4.7 percent.
I hope the government and those providing mortgages take a closer look at this data and start to rework their qualifications for who they think is best qualified to own a home. I can see their logic. Bigger down payment equals a homeowner who has more invested in the house and is less likely to just walk away. But as the data proves, it is more important that homeowners feel it is their duty to pay their bills and be accountable.
I have no problem with making it more difficult to own a home for people with a poor credit history. We need to change, because what was going on before – giving anyone with a pulse a mortgage loan – was not working. But do not punish my generation for the mistakes of older generations. I like to think I’ve learned from their mistakes. I will not spread myself too thin by reaching and buying a house that probably isn’t in my price range. I’ll wait to buy a home until I know I can afford the monthly mortgage payment and will have enough for the many other costs that come with owning a home. I just hope I won’t have to wait 14 years longer than when I’m ready because of the down payment requirements.
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