On the heels of our first-ever Agent Appreciation month, Inman is leaping into February with our Residential Finance theme month. Join us as we investigate how buying and selling a home is changing, from companies backing consumers in new ways to integrated services that handle the entire transaction.
Today’s millennial buyers are having more trouble assembling the cash for down payments than their older siblings and parents because they have higher levels of student loan debt and lower levels of wealth and personal income than their two immediate predecessor generations (Gen Xers and boomers) had at the same stage of their life cycles.
Mortgages with lower down payments can slice years off the time it takes to save and turn renters into buyers fast.
A Federal Reserve survey from 2015 found that consumers’ willingness to pay for a new home increases by about 15 percent when households can make a down payment as low as 5 percent of the purchase price instead of having to put down 20 percent.
But for current — and often relatively less wealthy — renters, their willingness to pay for a new home on average increases by more than 40 percent.
A wealth of down payment options
Not since lenders offered no down and low down payment mortgages at the height of the boom — loans that contributed to the housing crash and to millions of foreclosures — have first-time homebuyers been able to buy a home for so little cash.
In 2004, the median down payment for first-time buyers was three percent, and 42 percent of them were financing homes with no down payment at all. Even today, low down payment and no down payment programs are not popular with some lenders and policy-makers.
They argue that owners with low or no down payments have less of an investment in the home (sometimes called “skin in the game”). That’s one reason a million or more owners who had little invested in their homes because they put nothing down voluntarily abandoned their homes to foreclosure when prices fell so far that they owed more on their homes than they were worth.
So what’s the millennials’ secret? The answer is three letters: FHA.
Created to revive homeownership during the Great Depression, at the height of the housing boom in 2006, Federal Housing Administration accounted for less than five percent of the mortgage market. By 2010, its share exploded to nearly a quarter of all originations. Now FHA, with down payments for as low as 3.5 percent, is the loan of choice for millennials.
Like all most low down payment programs, FHA requires mortgage insurance, including an upfront payment of 0.85 percent of the loan amount. Lenders typically roll this upfront fee into the loan, so it does not increase the cash required to close.
A negative with many borrowers is FHA’s “life of the loan” policy, which requires borrowers to keep FHA’s mortgage insurance as long as they have an FHA mortgage. Owners who want to get out of an FHA earlier can refinance to a conventional loan.
However, FHA is not the only program available. There are thousands of low down payment loans and down payment assistance programs available today. Here are some options with lower down payments:
Two years agoLast year, Fannie Mae launched a 3 percent down mortgage option. Fannie Mae has offered a 5 percent down payment option for more than 25 years. The new option is available only to first-time homebuyers who qualify, and it requires mortgage insurance. Here’s more information.
Freddie also has launched a 3 percent down program called Home Possible Advantage that is not limited to first-time buyers but has income limits and requires borrowers to take Freddie’s homeownership education program.
U.S. Department of Agriculture
The Rural Development Service of the Department of Agriculture finances 100 percent (no down payment) loans for single family homes in designated rural areas. It includes an income limits. USDA also subsidizes low and very low-income buyers with of payment assistance. Click here for more information.
State and local housing finance agencies
Some 2,406 homeownership assistance programs available, and 84 percent currently have funds available to prospective homebuyers, according to Down Payment Resource. Most of the programs — 63 percent — are limited to first-time buyers. They include programs that employers offer to attract employees, programs for law enforcement workers and teachers, and programs sponsored by Wells Fargo and other lenders for lower income borrowers who have difficulty getting a loan
First-time homebuyers are defined as a buyer who has not owned a home in the past three years. To find out what is available in your market, here’s more information.
Despite the help that’s available, misinformation and fluid economic conditions are making it harder for young buyers to put together the down payments they need to become homeowners.
Rising home prices are raising down payments, especially for scarce starter homes in hotter markets. Soaring rents are making it harder for young buyers living in rentals to save for down payments.
At the same time, studies show that more than one out of three prospective buyers is overestimating how much they actually need for a down payment. They badly need the help of real estate professionals who will help them through the process.
Left to their own devices, young buyers will become much older buyers before they ever cross the threshold of a home they can call their own.