Prior to the real estate bubble bursting, the mortgage industry was filled with home loan opportunities promoting "no money down" or "low down payments." The lack of financial commitment from homeowners in relation to small down payments has been cited as one of the reasons for the recent upturn in home mortgage default and foreclosure. As a result, the Obama Administration announced their desire to gradually raise minimum down payments to 10 percent on conventional loans that can be bought or guaranteed by mortgage giants Fannie Mae and Freddie Mac (WSJ.com).
While there are some rare housing opportunities allowing consumers to buy a home for as little as $1,000, the norm is for consumers to secure a property with a combination of a down payment and a mortgage for financing. Individuals working to buy a property with homeloans backed by the Federal Housing Administration (FHA), typically need a minimum down payment of 3.5 percent to secure that insured loan variety while loans issued by private lenders typically require a 20 percent down payment.
Reasons for Raising Down Payment Minimums
Risk is a component affecting all loans. Within the mortgage industry, lenders review factors including credit scores, employment histories and down payment percentage to determine the risk presented by each borrower. Despite the dangers for borrowers lacking the magic numbers for credit, financial institutions allowed many home buyers to place very little to nothing down during the real estate boom. That move did not work out as the lenders had hoped. Many of those homes eventually became real estate owned. The new potential increases are being touted as a way to reduce the risk for lenders in the future.
During the course of business, banks have discovered that consumers who make large down payments are less likely to allow a home mortgage to become delinquent. Home buyers who invest significantly more of their own money into a home purchase will automatically have increased exposure to loss. That uncertainty to the home owner's equity can help reduce the chance of loan default caused by declining home prices.
That conclusion was made through a study conducted by the Federal Reserve Bank of Saint Louis, Missouri (2009). The research indicated that buyers who were allowed to made smaller down payments had increased chances of defaulting on a home loan during "unfavorable economic circumstances, such as a housing market slowdown or job loss," (WSJ.com).
Bigger Down Payments Can Save Money
While requiring larger down payments can limit the home buying potential of a home buyer in regards to what can be deemed affordable, the process can be a great money saving move. Buyers who opt to buy a home that fits well into their budget can end up saving money courtesy of not having to purchase costly private mortgage insurance (PMI).
Mortgage Marvel, the industry's leading mortgages rates origination tool defines PMI as "Insurance provided by a private company to protect the mortgage lender against losses that might be incurred if a loan defaults. The cost of the insurance is usually paid by the borrower and is most often required if the loan amount is more than 80% of the home's value. Sometimes referred to as mortgage insurance." Simply put, consumers who opt to a down payment of more than 20 percent of the home value, can expect lower monthly payments as PMI will not be a required expense.
Down Payments Already Getting Bigger
Real-estate portal Zillow.com conducted analysis for The Wall Street Journal and their research has indicated that after the real estate bubble burst, down payment averages started to increase. The research was conducted for Chicago, (Illinois), Las Vegas, (Nevada), Miami, Fort Lauderdale and Tampa, (Florida), Phoenix, (Arizona), San Diego, San Francisco, Stockton and Los Angeles, (California).
Tracking of the data began in 1997. According to the reports, during the late 1990's the median down payment was approximately 20 percent. The deposit amount started to decrease during 2001. During the fourth quarter of 2006, the average down payment dropped to 4 percent or less. This trend is cited as increasing the amount of underwater loans. However, the most recent statistics have shown that the median down payment amount has increased to 22 percent in regards to homes bought using conventional mortgages.
