Homebuyers’ Down Payments Shrink
U.S. home buyers are putting down less to purchase homes anymore.
According to Ellie Mae, whose mortgage software handles more than 3.7 million applications annually, the average downpayment is shrinking as more first-time home buyers enter the market; and, as mortgage guidelines ease nationwide.
Low- and no-down payment loans, including FHA loans, HomeReady™ loans, and the Conventional 97 program, remain widely-available for borrowers of all credit-types.
Today’s buyers also have access to USDA loans and VA loans — both of which require no downpayment whatsoever — and piggyback mortgages, which have made a comeback with buyers.
With mortgage rates still below 4% and home values rising in many U.S. markets, it’s an excellent time to be a buyer. The market may be less favorable to buyers in 2017.
Click to see today’s rates (Jul 16th, 2016)
What Is A Mortgage Downpayment?
A mortgage downpayment is the money you pay at settlement which goes toward the cost of your new home.
Mathematically, it’s the dollars between your home’s purchase price and your size of mortgage loan.
As an illustration, if you buy a home for $200,000 and your beginning mortgage balance is $190,000, your downpayment amount is $10,000.
Making a downpayment of ten thousand dollars is also known as “putting $10,000 down” or, in this example, “putting 5 percent down”.
The larger your downpayment, the smaller your loan size and, when you borrow less money, your monthly mortgage payments are less.
However, the money for making a downpayment has to come from somewhere.
Some consumers are fortunate and have ample savings for a deposit; or, have a family member willing to gift cash for a down payment. Others use proceeds from the sale of a former residence, or borrow against a 401(k) retirement plan.
For everyone else, “How much downpayment should I make?” becomes a question about risk and personal tolerance.
You Don’t Want To Ever Be “House-Poor”
Nobody wants to find themselves house-poor.
When you’re “house-poor”, it means that the majority of your wealth is tied up in your home; and, that you have little cash in the bank or in savings.
Bring house-poor can be dangerous — especially when life’s emergencies occur, such as sickness or job loss.
With all your money locked up in home equity, and with little or no money in the bank, coping with a sudden increase in expenses or loss of household income can put your finances in a downward spiral and result in the loss of your home.
You can’t just ask the bank to give your down payment back, after all, when you need those monies to help you pay your monthly bills.
The only way to get your down payment back from the bank is via a cash-out refinance. But, even then, there’s no guarantee that your request gets approved.
This is why home buyers sometimes prefer to make small downpayments. It leaves money in the bank for when emergencies occur.
And, in life, emergencies always occur.
Click to see today’s rates (Jul 16th, 2016)
Low-Down Payment Mortgage Options
According to Ellie Mae’s Origination Insight Report, in April, home buyer downpayments varied by loan program but, nearly all cases, downpayments were near the minimums.
For FHA loans, for example, which mandate a downpayment of at least 3.5 percent, downpayments averaged four percent.
For VA loans, which require no downpayment at all, downpayments averaged two percent.
Inclusive of these two programs, today’s home buyers have a multitude of low- and no-down payment mortgage options from which to choose.
Conventional 97
Available via Fannie Mae and Freddie Mac, the Conventional 97 is a 3% downpayment product available for the purchase of 1-unit, primary residence properties.
In general, the Conventional 97 program is best-suited for buyers with excellent credit, but it can make sense for buyers with average credit, too.
HomeReady™ Mortgage
The HomeReady™ mortgage program is another Fannie Mae-backed product. HomeReady™ allows for a 3% down payment, and offers discounts on mortgage rates and private mortgage insurance to borrowers who qualify for the program.
HomeReady™ is targeted toward multi-generation households in which multiple persons contribute to “family income”, but the program can be used by anybody living in a low-income census tract; or with an income which is below the average for the area.
FHA Loan Program
The FHA loan program allows downpayments of just 3.5% and can be used for primary residences with 1-4 units.
The main advantages of the FHA loan are that FHA mortgage rates tend to beat conventional rates; and, that FHA loans are assumable, which means that a future buyer can purchase your home and your mortgage rate, no matter what the then-current market rate happens to be.
Click to see today’s rates (Jul 16th, 2016)
VA Loan Guaranty Program
The VA Loan Guaranty program is a benefit available to military borrowers via the Department of Veterans Affairs. VA loans have no downpayment requirement and the agency never charges mortgage insurance — no matter how little you choose to put down.
VA mortgage rates are often the lowest among all of the low- and no-downpayment loan types. Like FHA loans, VA loans are assumable by future buyers of your home.
USDA Home Loan
Sometimes called “Rural Development Loans“, USDA home loans are backed by the U.S. Department of Agriculture and are available to buyers in less-dense parts of the country. This includes rural areas and many U.S. suburbs, as well.
USDA loans allow for 100% financing and offer reduced mortgage insurance costs as compared to other low- and no-downpayment loan types.
Piggyback Mortgages
The piggyback mortgage is not a loan program, per se — it’s more of a loan strategy. When you “piggyback” your mortgage, you use two mortgages, actually to maximize your borrowing at the lowest possible cost.
The typical piggyback strategy is to get a first mortgage for 80% of your home’s purchase price, and a second mortgage for up to 10% of the price.
Together, these two loans leave you with a ten percent downpayment and no private mortgage insurance (PMI) requirement.
What Are Today’s Mortgage Rates?
Home buyers are making smaller downpayments on homes as compared to one year ago. This is partly because first-time home buyers are a growing share of the market; and, partly because of looser mortgage guidelines nationwide.
Take a look at today’s real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.
Click to see today’s rates (Jul 16th, 2016)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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