Fixed-rate mortgage with just 5% down is alive and well


March 31, 1991|By ELLEN JAMES MARTIN

Looking to buy a house with just 5 percent down?

Then you'll be pleased to hear that reports on the death of conventional loans with a low down payment have been greatly exaggerated.

"Five percent down fixed-rate loans are alive and well," says Paul Havemann, a vice president at HSH Associates, the mortgage publishing firm.

Granted, as part of a consumer credit crunch that has also made it harder for regular folks to get credit cards or car loans, some lenders have closed their windows on 5 percent down fixed-rate conventional mortgages.

But many have not.

"We do a tremendous number of these loans," says Diane Cortes, senior vice president at Columbia-based PaineWebber Mortgage Finance Co., noting that 30 to 35 percent of the loans originated by her firm continue to be "5 percent downers," as some in the industry call them.

At the Towson office of GMAC Mortgage Corp., John Miley, a loan officer, tells a similar story. "Some lenders have changed, but we're bucking the trend in terms of down payment requirements," he says.

The reality is that making low down payment loans is good for business.

This spring, home sales are picking up in many communities and a large amount of the business is generated by first-time buyers bearing little cash. Making mortgages is a highly competitive business and a lender that refuses to deal with that population greatly limits its market, mortgage specialists observe.

It's understandable that lenders would be ambivalent about making 5 percent down mortgages, which these days are considered especially risky.

"Our feeling is that a transaction needs at least a 10 percent down payment to give the borrower sufficient motivation to fulfill his obligation," says Sam Lyons, a senior vice president for Great Western Bank, which has mortgage lending offices in Baltimore and Bethesda.

The theory is that the greater your ownership stake, the greater your incentive to keep up your payments, Mr. Lyons says. Statistics bear out that those who own more of a property are less likely to default, he says.

Through much of the 1980s, lenders could count on homes appreciating enough to give a buyer a decent equity stake within a couple of years -- even if he started with a skimpy down payment. But the slowdown in appreciating property values that has occurred in many communities within the past two years has made it possible for the reverse to happen.

"In a lot of areas, prices have fallen at least 5 percent, if not more. That wipes out any down payment that the borrower had.

"It means the property has been financed out to 100 percent of its current value or more and that's a no-no in the lending field," says Keith Gumbinger, an HSH Associates spokesman.

But don't let a lender give you the impression that his risk in making a low down payment mortgage is unmitigated.

Remember that a home mortgage is secured by the property it finances and that through the foreclosure process, the lender can take possession of the property after the borrower has failed to make several consecutive payments. Typically, the lender will get back a large percentage of the unpaid debt when he sells the home at auction or through another method.

Remember, too, that virtually everyone who takes out a 5 percent down conventional mortgage is required to cover the cost of a private mortgage insurance policy which covers most of the losses sustained by a lender after the foreclosure process is complete.

Despite these protections, however, lenders sleep more peacefully when the loans they make perform as promised rather than go into default, points out Mr. Lyons, of Great Western Bank. "Default is uncomfortable -- whether you have private mortgage insurance or not. You have to go through the collection effort. And many of the loans that go into default won't go through foreclosure," he says.

If you're a candidate for a low- down-payment loan, mortgage spe

cialists offer these pointers:

* Polish your credit history.

Even lenders that still make low down payment fixed-rate mortgages are more stringent in their credit requirements on these loans than on those involving larger down payments.

It's always a good idea to obtain copies of your credit reports in advance of applying for a mortgage. There's a significant chance that you'll find an error on one of these reports and it's better to correct them before the lender gets its copies.

Even if the blemishes on your record are legitimate, you'll want to assemble materials explaining why they occurred. For example, if late payments are related to the fact that you were temporarily unemployed through no fault of your own, you might want to obtain a letter from your former employer to that effect.

"As the borrower, you'll want to scramble to fix the damage," Mr. Havemann says.

* Consider other low-down-payment alternatives to the conventional mortgage.

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