Smaller Down Payments Lure More Buyers

January 26, 2015

Some home buyers are stepping off the sidelines as more lenders require less money up-front on a home purchase.

Recently, more borrowers are able to pay 3 percent or even less of a home’s purchase price to get a mortgage – a big change from when at least 20 percent down payments were practically the norm post-recession.

Additionally, some lenders are luring more home buyers back by waiving mortgage-related fees and even showing more acceptance of allowing down payments to be made by others, such as the borrower’s family members, The Wall Street Journal reports.

Still, borrowers must have good credit scores and a steady income to often qualify for these smaller down payment loans.

In two big moves in recent weeks, the Federal Housing Administration, which insures mortgages with down payments as low as 3.5 percent, announced it is lowering its annual mortgage-insurance premiums on new mortgages beginning Monday. The move is expected to save a typical first-time home buyer about $900 a year. What’s more, Freddie Mac and Fannie Mae recently lowered the minimum down payments they will accept on loans they back from 5 percent to 3 percent.

Lenders have reportedly been lowering requirements on “jumbo” mortgages too -- loans that exceed $417,000 in most parts of the country and $625,500 in more expensive housing markets. For example, PNC Financial Services Group lowered its requirement from 20 percent down for jumbos up to $1.5 million to 15 percent down. Last year, Wells Fargo started allowing down payments of 10.1 percent on jumbo mortgages; previously its lowest down payment on jumbos was 15 percent, The Wall Street Journal reports.

So far, the changes appear to be luring more home buyers. For the week ending Jan. 9, the Mortgage Bankers Association reported that applications for home purchases -- viewed as a gauge of future homebuying activity -- rose to a seasonally adjusted 24 percent from the prior week. The MBA credited most of that jump to the new 3 percent down payment option for qualified buyers, announced by Fannie Mae and Freddie Mac.

However, financial experts urge borrowers to realize the risks that come with making smaller down payments and also ensure they are the best move for them.

Borrowers who make smaller down payments are more at risk of owing more on their mortgage if property values should decline, notes Jack McCabe, a housing analyst in Deerfield Beach, Fla. Also, borrowers likely will have to pay higher costs over the life of the loan – including higher interest rates and usually mortgage insurance. Financial experts urge borrowers to compare costs, including the interest rate, and whether they have to pay any upfront fees to get that rate. Also, in exchange for a low down payment, borrowers often will be required to pay an extra fee for private mortgage insurance if a down payment under 20 percent is made. Often borrowers who have higher credit scores, smaller loan amounts, and fixed-rate mortgages pay less, The Wall Street Journal notes.

Source: “Down Payments Get Smaller,” The Wall Street Journal (Jan. 23, 2015) and “Loan Demand Posts Biggest Leap in 6 Years,” REALTOR® Magazine Daily News (Jan. 14, 2015)