In the news recently, you’ve probably heard about rising mortgage down payments. The QRM (qualified residential mortgage) rule under discussion right now is a risk management issue. The government wants to avoid another mortgage collapse. So lawmakers are looking at all the factors they say caused the bubble to first burst. One of these factors is risk. So right now, they’re looking at anyone with credit problems or past delinquencies, and they’re requiring them to put down 20% cash on the mortgage. That means that on a $150,000 mortgage, a buyer would need $30,000. Think about it…do you have that kind of cash on hand? Even a house selling for $80,000 would require $16,000 in cash to secure the mortgage. Imagine how much time you would have to save to have this kind of money.

Here’s a look at how a worksheet says it would work:

• The median home price in 2009 was $172,000.
• A 20% down payment would be $43,025.
• A median salary in 2009 was just under $50,000.
• A “responsible” saver should be able to handle $250 a month.
• That means about 14 years of savings for the down payment.

If you want to do it in less time, it would be around $500-$600 per month. The other option is that the lender (bank) must maintain 5% interest on that loan. Most banks don’t want to be forced to keep skin in the game. Many smaller mortgage banks don’t have that kind of capital.

it’s not just you

At this point in our country’s business cycle, many people have some type of credit problem. This QRM rule means that a high percentage of people will need to either make a much larger down payment on their mortgage or find a lender willing to keep the money in the loan to reduce risk. Overall, it seems like a difficult situation at best, most likely impossible.

What can you do?

As a first time homebuyer, you have the option of FHA. That loan program requires a 3.5% down payment. But that can still be a difficult thing for someone who is renting and just starting out in life, such as a first-time homebuyer. There are still options. In fact, these 100% financing options aren’t just for first-time homebuyers. You can take advantage of these loan programs even if you already have a home and want to upgrade it.

100% Financed Mortgage Loans

• USDA Rural Development Loan: The United States Department of Agriculture supports this loan program. Covers homes outside the city limits, hence “RD Loan”. But do not worry. It doesn’t mean you have to buy a house in the back of a suburban farm. “Outside city limits” can mean a lot of things when it comes to where you might live. This could place you in a house in a small town or village near a larger city. Michigan has municipalities that are similar to towns. RD loans cover many of those areas. So whether you’re looking for a home in the country or somewhere outside of city limits, a USDA Rural Development loan can offer 100% financing.
• VA Loan – VA stands for “Veterans Affairs.” VA loans are available to military veterans. The loan program aligns very closely with FHA standards. However, they often come with lower closing costs and more liberal loan terms. So instead of a 3.5% down payment, VA loans offer zero down most of the time. Sometimes you can even negotiate interest rates. Veterans must obtain a certificate of eligibility from the Department of Veterans Affairs to give to a lender when applying for a mortgage.

As the market struggles to improve, the government wants to keep risk low. Yet even Democratic Rep. Barney Frank says he thinks the 20% down payment is too high. The Federal Housing Administration is also concerned about this move. Acting FHA Commissioner Bob Ryan says the requirement will likely prevent creditworthy borrowers from getting low-cost QRM loans.

The bottom line

Yes, you can find what amounts to “no down payment mortgages” for first-time homebuyers. You must be a veteran or find a qualifying home through the USDA Rural Development program.