Loans that required no down payments were one of the many causes of the high defaults and record foreclosures of the past six years. No down payment programs have virtually disappeared because it’s generally accepted that a borrower who little to no “skin in the game” is a higher default risk than a borrower with equity. Now we are faced with the question: have down payment requirements become too stringent?
The median downpayment made by all homebuyers in 2012 was 9 percent, ranging from 4 percent for first-time buyers to 13 percent for repeat buyers, according to the National Association of Realtors’ 2012 Profile of Home Buyers and Sellers. The median down payment in 2012 was the lowest since 2009 but still far above the levels during the housing boom, when nearly half of first-time buyers made no downpayment at all.
Down payments have important benefits. They reduce the amount of principal owed, which reduces the interest to be paid over the life the loan. They also improve a borrower’s debt-to-income ratio, a key factor in getting approved for a mortgage. However, for most first-time buyers, saving for a down payment is the hardest step in buying a home and they’d rather decrease, not increase, the amount they put down.
Actually, first-time buyers have several ways to get financing with a lower down payment. The Federal Housing Administration’s guaranteed loan program requires only 3.5 percent down from most buyers. FHA currently backs 15 percent of U.S. mortgages, but FHA loans are less attractive than they used to be. In the past three years, FHA has raised premiums and tightened credit standards in an effort to avoid seeking government aid to cover deficits caused by defaults. Last fall, the agency announced it suffered a $16.3 billion insurance-fund shortfall. More than 17 percent of all loans were delinquent. FHA is increasing its annual insurance premium in 2013, which will raise borrowers’ costs by $13 a month on average.
Veterans can qualify for no-down payment VA loans and people living in rural or exurban areas might qualify for no-down payment mortgages under the US Department of Agriculture’s Rural Development guaranteed loan program.
Even lesser-known options are hyper-local assistance programs sponsored by hundreds of local and state governments to encourage buyers to locate in their jurisdictions by offering loans and sometimes even grants to cover the cost of down payments. As many first-time buyers struggle to save, hundreds of thousands of dollars in down payment assistance remain unclaimed.
Many of these programs are Workforce Housing initiatives to encourage law enforcement officers, firefighters, teachers, nurses and other public workers to live close to their work. Others are designed to attract young professionals to neglected neighborhoods. Some even provide down payments to encourage buyers to purchase and renovate foreclosures.
Ohio Housing Finance Agency’s Target Area Loan Program is a good example of a program designed to revitalize federally-designated economically distressed areas by making affordable loans products and competitive interest rates available to qualifying buyers purchasing a home in these areas.
In addition to below market, 30-year fixed mortgages, borrowers with good credit and modest income levels that meet local limits can get down payment grants to buy properties up to two acres with single-family dwelling and duplexes up to four units.
Another approach is to provide low interest down payment loans rather than grants. California Homebuyer’s Downpayment Assistance Program provides first-time homebuyers who take homeownership education and who meet income limits a deferred-payment junior loan. The loan to be used for their down payment and/or closing costs can be up to 3 percent of the purchase price, or appraised value, whichever is less.
Under Connecticut’s Down Payment Assistance Program, buyers need not be first-time buyers to obtain a down payment assistance loan. However, applicants are required to use all liquid assets or household savings above $5,000 towards the down payment first before obtaining the loan. They must also take homeownership education classes. The loan’s interest rate is set at the same rate as the borrower’s primary mortgage.
These are but a few of the down payment assistance programs that are available. Such programs are very underutilized; only about two percent of all buyers used down payment assistance programs last year. No national database of these programs for buyers yet exists, but soon Atlanta-based Down Payment Resource plans to launch a new website that will allow buyers to search for nearby assistance programs.
If you’re looking to buy a house but are scrambling to come up with a down payment, check with your state or local housing authority. Assistance may be just a phone call away.
Steve Cook is managing editor of Real Estate Economy Watch, which was recognized as one of the two best real estate news sites of 2011 by the National Association of Real Estate Editors. Before he co-founded REEW in 2007, he was vice president of public affairs for the National Association of Realtors. In 2006 and 2007, he was named one of the 100 most influential people in real estate.