Declining Markets Force Banks To Increase Down Payment Requirements; What To Do?

By Jay Voorhees

February 22, 2023 4 min read

Declining Markets Force Banks To Increase Down Payment Requirements; What To Do? In January, I blogged about appraisers checking “The Dreaded Declining Markets” box on appraisals.

I highly recommend re-reading that blog, as the issue is much more prominent now – particularly with commercial banks offering jumbo loans.

Here are some of the key points I made: (1) it is appraisers who make the designation and not the banks; (2) it is just the appraisers doing their job (they’re not “evil”), as they have to mark the box if median home values are declining; (3) it is very frustrating nonetheless because median home values can be misleading; (4) the designation often unnecessarily alarms buyers; and (5) it is causing many banks to increase their minimum down payment requirements by 5% or more.

What I failed to do in that blog was set out all of the options borrowers have when faced with that designation.

Here are a borrower’s options when banks increase down payment requirements because of a declining market designation:

Put More Down. If the bank is offering a very low rate and the borrower has the cash, she should simply put more down if she does not mind parting with the cash.
Switch to Fannie Mae/Conforming Financing. Fannie and Freddie don’t care about the designation, or they at least do not change down payment requirements when appraisers check the “declining markets” box. And now that conforming financing goes all the way up to $1,089,300 in California and up to $726,000 in Texas – conforming financing is a much more viable option for many jumbo borrowers. Fannie Mae also only requires as little as 5% down. BUT the caveat is that Fannie Mae rates are higher than those offered by most commercial banks.
Switch to 80/10/10 Financing. If buyers need to borrow more than Fannie Mae allows, they can always get a 2nd mortgage or a home equity line of credit behind their first mortgage. This is something we offer from the start occasionally for borrowers who might want to borrow $1.5 million for example, and who do not qualify for competitive jumbo financing for a variety of reasons (lower credit scores; less than 20% down; high debt ratios; etc.).
Switch to Other Jumbo Investors/Lenders Who Do Not Care About Declining Markets. As a mortgage bank, we can sell our loans to over 20 different jumbo investors – many of which do not require down payment increases in “declining markets.” Similarly, we can also broker to several jumbo lenders that do not care about “declining markets.” As a quick aside, when we broker a loan, we send the package to a “wholesale lender” that underwrites and funds the loan on our behalf with its warehouse line. This is in contrast to our “banked” jumbo loans that we underwrite and fund internally – before we sell them on the secondary market to various jumbo investors. Similar to Fannie Mae loans, the rates that these institutions offer are often higher than those offered by commercial banks right now.
Switch to Non-QM Financing? Not so much…. Most of the non-QM (alternative financing) lenders have increased their down payment requirements right along with the commercial banks. Many have also increased their rates too. So, non-QM is often NOT a viable alternative for a well-qualified jumbo buyer.
Rebut the Designation. I mentioned this option in the blog I linked to above. When we rebut the designation, appraisers often come back to us and say: “Oh, sorry about that; I was definitely in the wrong and I removed the designation.” OK… appraisers never say that. 😊 BUT – we are doing everything we can to get the designation removed when we have the data.