Credit squeeze: The problem with down payments

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News item, and then an e-mail from a reader. First the item, from Reuters: ‘As U.S. banks mop up the mess from billions of dollars of bad home loans, buyers are finding the days of cheap money are over and, in many cases, tougher versions of old lending rules now apply. ... Gone are the days when almost anyone could get a loan with a down payment of less than the traditional 20 percent.’

Now the e-mail, from reader LTL: ‘Today I went online to try and see what I would qualify for if I tried to get an FHA loan. A bit about me, I’m 29, married, with two young children. I’m a lawyer, with household income of $225k/year. We recently relocated back to LA.

‘Knowing that the new Freddie/Fannie limits had gone up, Today I went to the FHA website to see what I could qualify for. I saw that the L.A. County mortgage limit had increased to $729,750, which coupled with a 3% down payment, yields a maximum purchase price around $750,000. Or so I thought. Upon running my numbers (225k annual salary, $500/month car payment, $900/month education loan payment), I only qualified for a FHA loan of $362,790 with a 3% down payment of $10,973. It calculated a total monthly housing payment (PITI) of $3661, leaving me over 10k in left over income.

‘The same calculator also yielded what I would qualify for with a ‘conventional’ loan. I apparently qualify for a ‘ conventional’ loan of $672,378 with a down payment of $118,655, for a total maximum purchase price of $791,033. My monthly housing costs would be $7,472, leaving $7,541 in remaining income. So that’s almost 50% of my income (and I haven’t figured out how the calculator figures my take home income) for housing.

‘I don’t think most people have my annual income, I feel very lucky to make what I do, and I know that census statistics back up my contention that the percentage of people who make more than me is very small. So obviously, the FHA loan program is of little use to buyers in L.A. If I can’t qualify for the maximum amount, who can? And if I went with the conventional loan, I would need over 120k in the bank for a down payment. How many people have that sitting around? Not many. Most buyers over the last few years have put nothing down, let alone 6 figures.

‘I would especially be interested to hear what the real estate agents and Cal have to say about what they are seeing when people attempt to qualify.’

Thanks, LTL. Before I ask for comments, an observation: I know many here believe the market should return to the days when a sizable down payment was required to purchase a home. If that comes to pass, the California market will remain weak for quite a while. If you take low-down-payment buyers out of this market, you shrink the pool of buyers sharply.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com