Mortgages with low down payments are returning, making it easier
for cash-strapped homebuyers to make the leap. As of May 1, the
average down payment has dropped 9.4 percent in two years,
according to Megan Greuling, a spokesperson at LendingTree.com.
"Borrowers with small down payments have more options now, and
options that are more affordable," says Erin Lantz, director of
Zillow Mortgage Marketplace.
"The availability of lower down payments had been increasing for
several years, but the trend certainly accelerated when the
FHA started raising premiums
last year," says Guy Cecala, publisher of Inside Mortgage
The game is changing
When standards tightened following the downturn,
were the only game in town for buyers with low down payments. "The
whole housing market was on its knees then and most mortgage
companies were struggling to survive. Conventional mortgage
companies couldn't offer any products in the high LTV ratio which
should be their bread and butter," says Cecala.
But now, the game is changing, and not just for cash-strapped or
first-time homebuyers. "Improvements in the entire lending industry
are happening," says Lantz. "The environment is changing from the
extreme credit tightening when the bubble burst." Indeed, the
number of lenders offering conventional loans with down payments of
5 percent to 10 percent is twice what it was two years ago, she
Through the first four months of the year, 73 percent of all
down payments on conforming 30-year fixed-rate loans were less than
20 percent, and almost 40 percent were between 5 percent and 10
percent, according to Greuling.
Increased activity means lower down payments
Property values are up while
are still quite low. "Essentially what is happening is not so much
consumers desiring to put less down, but that more lenders are more
willing," says Doug Lebda, CEO at LendingTree.com.
"We are coming back to a normalized market," he says. "I don't
think the pendulum will swing back to 2007 -- but to where
borrowers who were previously denied are now able to access these
historically low mortgage rates."
Property values have increased 9.3 percent over the last year,
according to S&P/Case-Shiller, and existing-home prices show 13
consecutive months of year-over-year increases, according to the
Buyers once again have to compete to clinch the deal.
Paul Reid, a Redfin real estate broker who recently sold his
home in Orange County, Calif.,
received 20 offers
, most of which were from buyers intending to put 10 percent down
or less, and all the bids were above his asking price.
"For the American homebuyer, credit is getting easier and
interest rates are still extremely low," Reid said in an email.
"Small lenders and credit unions are making loans for 3.5 percent
to 10 percent down for the first time in years."
Attracting home buyers
Lower down payments are a way for the lenders to stand out among
"As the credit crunch is easing, lenders are more comfortable
with mortgage-market risk and, equally important, they are looking
to increase business in a market where interest rates are probably
going to rise," says Cecala. "We have a pretty plain vanilla
mortgage market. All lenders are offering pretty much the same
product. So to differentiate themselves, some lenders will say,
'We're willing to do 5 percent down on conventional loans.'"
The winding down of the refinance boom also plays a role, said
Reid. "Now that most people who can refinance have done it, the
banks need a new batch of customers. And private mortgage insurers,
notoriously strict after the bubble burst, are starting to loosen
up their standards."
"We are not returning to the very easy credit days that we saw
in 2007," says Lantz. "Yes, we are seeing an uptick in credit
availability, but I wouldn't want to imply that we are returning to
the frenzy. This is incremental loosening."
The strategy remains a balancing act for lenders across the
country. While down payment standards seem to be easing the most in
markets which are rapidly improving, requirements are not loosening
straight across the board. Rather, standards are shifting so that
if one guideline is stricter -- a higher credit score, for example
-- another one can be adjusted, in this case the down payment.
Experts agree: It's the busy spring home buying season, and
lower down payments are returning just in time. Homebuyers can
utilize a mortgage payment calculator to see how different size
down payments will ultimately affect how much they pay each