Down payment going up for home buyers

The Chicago Sun-Times reports:

You're likely to have to shell out a bigger down payment if you're buying a house anywhere in Cook County and the rest of the Chicago metropolitan area.

Chicago resident Doug Schenkelberg and his wife, Rachel Unruh, thought they were wrapping up the purchase of an Oak Park home when he found he needed another $15,000 -- 5 percent of the home's price -- to make the sale happen.

His mortgage broker told him he had to put down the additional amount, effectively doubling his down payment requirement because of where the home was located.

Schenkelberg was shocked. "They are making a determination on financing that's based on a geographic area, independent of the qualifications of the buyer," he said.

Their situation isn't unique.

New lending rules limit the share of a home's price that can be borrowed in areas where home prices are declining.

Virtually all of the ZIP codes in the Chicago metropolitan area are characterized as so-called declining markets by Philadelphia-based mortgage insurer Radian Guaranty.

While borrowers recently had been able to get 95 percent or 100 percent financing, lenders and mortgage insurers have changed that requirement to 90 percent to 95 percent financing. Those willing to put down 20 percent of the home's value or more are unaffected.

"Eight months ago, if you could come up with 35 cents, you could get in," said Marve Stockert, executive director of the Illinois Association of Mortgage Professionals, which represents brokers, agents and others in the industry. "One-hundred percent financing was pretty common. Now it's pushed back to 90 percent."

Fannie Mae -- the biggest funder of mortgages -- lenders and mortgage insurers are requiring the higher down payments in the aftermath of a housing foreclosure crisis and plummeting home values.

"It helps to manage our risk in those markets where house prices are declining" said Oscar Gunther, vice president of risk and underwriting guidelines for Radian Guaranty, a major mortgage insurer.

Radian said it relies on data from the Office of Federal Housing Enterprise Oversight showing quarter-over-quarter declines in the house price index to aid it in putting together its list of defining declining markets, a list that's updated quarterly.

Fannie Mae also changed its maximum loan share by 5 percent, but spokeswoman Marilyn Kornfeld wouldn't comment on where those markets are or whether it relies on ZIP codes.

Given current market conditions, she said the maximum financing policy was necessary.

"We need to conservatively manage our business and risks, through prudent pricing and underwriting," she said.

The changes come amid calls from Federal Reserve Board Chairman Ben Bernanke for more action by lenders to address the home foreclosure crisis, including reducing the principal amount of borrowers' loans. Yet, the higher down payment requirements are likely to make it harder to buy or sell, potentially prolonging the housing industry's woes.

Schenkelberg and Unruh are working with another lender now and expect to complete their purchase.

Higher down payments mean the demand for housing,in the short run,is going down.Forgot what the Fed is doing or saying.Does it matter if the Fed cuts interest rates and you don't have enough money for a down payment? No.So, housing in many areas will have to drop until people can put enough money down.While the Fed is easing,credit standards are tightening.It's that simple.You'll be hearing more about putting 20% down and 2.5 times your annual income,especially since housing prices can drop over 20% in a year in certain areas.