More lenders are lowering down-payment requirements,
allowing borrowers to commit 3%, or even less, of a home’s purchase price to
get a mortgage. Most had been requiring down payments of 20% or more since the
recession began, with a few exceptions. Some lenders also are waiving
mortgage-related fees, and more are allowing down payments to be made by other
parties, such as the borrower’s family.
The deals are aimed at buyers with good credit scores and a
steady income who have been unable to save enough for a sizable down payment.
They are often targeted at buyers who live in expensive housing markets, where
even a small down payment can equal tens of thousands of dollars.
The trend toward lower down payments has picked up since mortgage-finance
giants Fannie Mae and Freddie Mac, which buy most mortgages from
lenders, recently lowered the minimum down payments they will accept to 3% from
5%. The changes are driven by an Obama administration effort to make
homeownership affordable to a wider group of buyers.
Low-down-payment mortgages have long been available. The
Federal Housing Administration insures mortgages with down payments as low as
3.5% and it is lowering the annual mortgage-insurance premiums on new
mortgages beginning on Monday.
Borrowers should be aware that small down payments leave
them more at risk of owing more on their mortgage than the property is worth
should home values in their market decline. In addition, borrowers likely will
incur higher costs over the life of the loan, including higher interest rates
and, often, mortgage insurance.
The moves come as mortgage originations declined substantially
last year. Lenders gave out an estimated $1.12 trillion in mortgages in 2014,
down 39% from a year earlier and the lowest amount since 1997, according to the
Mortgage Bankers Association, a Washington-based trade group. Most mortgages
have been going to existing homeowners who are refinancing into lower interest
rates, as demand among home buyers has been low compared with historical norms.
Regions Bank, a unit of Regions Financial, launched a
mortgage program in September that allows some borrowers to make a 5% down
payment. The bank says it will lower that requirement in the next few weeks to
3%. To qualify, borrowers must meet certain criteria, including not having
owned a property or had a mortgage in the past three years. The banks allow
borrowers’ down payments to be partially or fully funded by family, nonprofits
or other sources. Lenders also have been lowering the bar for large mortgages,
known as ”jumbos,” which they typically hold on their books. Such loans exceed
$417,000 in most parts of the country and $625,500 in pricier housing markets
such as New York and San Francisco.
Wells Fargo began permitting down payments of as little as
10.1% last year on jumbo mortgages. Previously, its lowest down payment on
jumbos was 15%. Borrowers who want to get a mortgage with a particular lender
should ask if it would allow a lower down payment than what is officially
offered. The costs associated with these low-down-payment mortgages can vary
significantly. The interest rate and fees borrowers pay often depends on
whether the lender plans to sell their mortgage to Fannie or Freddie, or if it
plans to hold the loan on its books, in addition to borrowers’ qualifications.
Borrowers need to compare costs, including the interest
rate, whether they have to pay any upfront fees to get that rate, and what
their total costs to get the loan will be. A lower interest rate might not be a
good deal if it requires larger out-of-pocket payments. Often, borrowers have
to pay an extra fee for private mortgage insurance, which protects the lender
from incurring significant losses if the borrower defaults, in exchange for a
low down payment.
Mortgages purchased by Fannie Mae and Freddie Mac usually
require private mortgage insurance if the down payment is less than 20%.
Lenders generally decide which mortgage-insurance firm to work with. Borrowers
with higher credit scores, smaller loan amounts and fixed-rate mortgages pay
less.
Before signing up, borrowers should find out if they will
incur these costs, and for how long. They should consider asking their lender
if they can stop paying this fee when they reach at least a 20% equity stake in
the home through a mix of home-price appreciation and amortization. Lenders who
hold low-down-payment mortgages on their books typically don’t require this
insurance. But the loans may not be a bargain because they often charge
interest rates that can be an eighth to a quarter of a percentage point higher.
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