Photo: Robert Clark
More than two-thirds of US renters claim down payments are the biggest barrier to buying a home.
But would-be homebuyers may be worrying about down payments more than they should, according to a new study by DC think tank the Urban Institute.
While rising interest rates and tighter lending practices can be a challenge — particularly for lower income and first-time buyers— most potential buyers are largely unaware of the payment assistance programs available.
“Contrary to consumer perceptions, most borrowers do not put down 20 percent and access to homeownership is not limited by down payments alone,” reads the Urban Institute study.
In a recent survey conducted by the Urban Institute, 66 percent of current renters find it “somewhat or very hard” to save for a down payment, and most (65 percent) believe they need to put “at least 15 percent” down. Just 16 percent of respondents said that “it wasn’t difficult at all” to save for a down payment.
This is part of the growing myth of the 20 percent down payment, claims the Urban Institute. The median down payment in the US in 2017 was just 5 percent, compared to 20 percent in 2006 — just before the housing market crashed.
While most low down payment lending is done through Federal Housing Authority (FHA) loans, the Government Sponsored Enterprises (Freddie Mac and Fannie Mae) both have 3 percent down programs which have grown rapidly in recent years — from 1.2 percent in 2014 to 11.1 percent in the first half of 2018.
And it wasn’t just prospective homebuyers that bought into the down payment myth. Urban Institute says that 65 percent of current homebuyers are also unaware of low down payment programs.
In addition to down payment woes, current renters were also concerned about qualifying for a mortgage (53 percent) and the amount of their personal debt (50 percent). The former is a very real concern.
The Urban Institute reports that the median credit score for mortgages has increased 20 points over the past decade, preventing many potential homebuyers from qualifying for a mortgage. In April 2018, the median credit score for new purchase loan originations was 728.
However, the FHA serve more borrowers at the lower end of the credit score spectrum. In 2017, 21 percent of all FHA originations were for borrowers with credit scores below 640, compared with just 1 percent for the GSEs.
Affordability is still a concern for most potential buyers, but Urban Institute says that for most buying is still more affordable than renting.
“The median family spends 28.1 percent of its income to pay rent but spends only 26.8 percent of its income to afford the monthly mortgage payment, including taxes and insurance, given a 3.5 down payment. This share of income is even lower for families who made a 20 percent down payment,” reads the report.
Nationally, as of June 2018, the share of median income needed for a 20 percent down payment on the median home was 23.3 percent, up from 18 percent in June 2012. But through a 3.5 percent down payment program, the income drops to about 18 percent.
Click here to read the entire study.