Fewer people bought a house with just a 3% down payment in 2014 than in any of the previous 10 years. That might sound like a positive thing because it means the purchaser owns more of the house and the bank owns less, but experts say it suggests that first-time buyers are not fueling the housing recovery.
Only 25% of house purchasers taking out all residential house loans (conventional or Federal Housing Administration loans) put less than 3% down when purchasing a home, versus 27% in 2013, according to new analysis by real estate data firm RealtyTrac of nearly 20 million loans for single-family homes and condos nationwide over the last 10 years. That’s the lowest level in a decade. First-time buyers are among the most likely candidates for these loans. “It may seem like a lot but the average over the past 11 years has been 33%,” says Daren Blomquist, vice president at RealtyTrac.
The government has been promoting these low down-payment loans in an effort to encourage more first-time buyers get a leg on the property market, Blomquist says. The FHA has offered a 3.5% down payment loan, and many can be below 3% due to down payment assistance programs, he adds. The government-backed lending enterprises Fannie Mae and Freddie Mac recently introduced the 3% down payment loan program, and the U.S. Department of Housing and Urban Development also lowered the insurance premiums that low down payment borrowers have to pay, which Blomquist says would save the average house buyer $917 a year.
“If you don’t have a lot of money for a down payment, you may be out of luck in this housing market,” Blomquist says. “A lot of first-time home buyers don’t have a lot of money to put down or else they would be participating in this market more,” he adds. “If first-time home buyers don’t return to the market in greater numbers, it signifies a shift where a primary avenue of building wealth for middle-class Americans — homeownership — is no longer as readily available.”
Buyers can get a 97% loan-to-value mortgage through an FHA loan paired with a down payment assistance program that provides a second loan to cover all or part of the down payment, an FHA loan where the closing costs are rolled into the mortgage and/or a purchase-and-rehabilitation loan where the borrower is able to borrow based on the “after-repair” value of the property rather than the current value, which is typically lower since this is mostly used with distressed properties, Blomquist says. In the latter case, he adds, the bank may determine the value of the home post-repair will be actually greater than the actual mortgage.
There’s a downside to 3% down payments for those who qualify. Because the low down payment loans are considered higher risk, they come with mortgage insurance, which represents extra cost on the monthly housing payment and also represents another layer of qualification that the borrower has to go through to get the loan, Blomquist says.
There was an unusual bump in 2009 when down payments of 3% or less peaked at 46%. After subprime lenders exited the market in the wake of the 2008 financial crash, “the FHA stepped in to fill the gap,” Blomquist says. The FHA loans are disproportionately low down payment loans so those became a bigger share of the market. In addition, around the same time there was a first-time home buyer tax credit that was introduced that spurred more purchases by first time home buyers making low down payments.
The lower the average sale price, the lower the down payment. For purchases with no down payment — where the combined loan was actually more than the purchase price — the average sale price was $154,214 last year. But for those homes that cost more than $502,213, the average down payment was more than 50% of the average purchase price. “This shows that those who do have cash and feel optimistic about the job market are buying,” says Don Ganguly, CEO of HomeUnion, an online platform that helps investors buy and sell single-family homes. “It’s a little bit of the story of the haves and have-nots.”
The bad news: It could take an average of 12.5 years to save up for a 20% down payment — a common requirement by banks — with a personal savings rate of 5.6%, according to separate research by RealtyTrac released last November. RealtyTrac’s figures are based on current house prices — and don’t take into account possible further rises in home prices. However, if the down payment for a conventional loan was lowered to 3% from the traditional 20% — as was recently suggested by Melvin Watt, director of the Federal Housing Finance Agency — it would take less than two years.