Low down payments become more common in home buying

Down payments under 20 percent are becoming increasingly common, according to the mortgage and financial data analytics company Black Knight Financial Services. The company says that while low down payments are at their highest point in seven years, they do not necessarily pose any added risk to the stability of the housing market.

In its latest Mortgage Monitor Report, which included data through the end of June, Black Knight Financial Services found that 1.5 million borrowers had purchased a home with a down payment under 10 percent. Ben Graboske, executive vice president of Black Knight Data & Analytics, said the overall increase in lending for purchase mortgage accounts for some of the growth.

However, the increase comes after nearly four consecutive years of declining use of low down payments. The analysis found that down payments under 10 percent of the home's sale price now account for 40 percent of purchase mortgages.

"The bulk of the growth has not been among the various 3 percent or less down payment programs that have been reintroduced in the last few years, but rather in 5 to 9 percent down payment mortgages," said Graboske. "This segment grew at twice the rate of the overall purchase market in late 2016, whereas lending with down payments of less than 5 percent grew at about the market average.

Graboske stressed that mortgages approved with low down payments have a different risk profile than those granted in 2005 to 2006, shortly before the subprime mortgage crisis caused a steep decline in home values. He said nearly half of the low down payment mortgages originating at that time involved second liens instead of a single loan with a high loan-to-value ratio. A large share of these loans also had adjustable rates rather than fixed rates.

In addition to adjustable rate mortgages being "virtually nonexistent" among current loans with high loan-to-value ratios, Graboske says borrowers who are making smaller down payments also tend to have better credit than those who made smaller down payments prior to the collapse of the housing bubble. The analysis found that borrowers making down payments of 5 percent on loans backed by government-sponsored enterprises such as Fannie Mae or Freddie Mac had credit scores that averaged 60 points higher than comparative borrowers in 2004 to 2007.

While the rate of serious delinquencies, or mortgages that were 90 days or more past due, was significantly higher among loans with a 3 percent down payment than it was among loans with a 5 percent down payment in the past 15 months, delinquencies were still comparatively rare. Black Knight Financial Services found that purchase loans with a loan-to-value ratio of 4 percent or higher had a delinquency rate more than 90 percent lower than those originated between 2004 and 2005, with only one in 450 being seriously delinquent 15 months after origination.

The analysis determined that 3.8 percent of U.S. mortgages in June were delinquent by 30 days or more, but not yet in foreclosure. This rate crept up 0.12 percent from May, but also marked a year-over-year decrease of 11.84 percent.

Black Knight Financial Services says the Federal Housing Administration and Veterans Administration have typically administered mortgages with low down payments, but that government-sponsored enterprises have become more prominent in this field in recent years. More than a quarter of purchase loans backed by Fannie Mae or Freddie Mac have down payments of 10 percent or less, and these enterprises accounted for 10 percent of all purchase loans with down payments of 5 percent or less between 2016 and early 2017.

However, the analysis from Black Knight Financial Services came shortly after Freddie Mac announced that it would be tightening requirements on certain loans with low down payments. While it previously allowed gifts or grants from family, friends, or others to help borrowers muster enough funds for a 3 percent down payment, it now only permits such gifts or grants after the borrower has provided the 3 percent down payment on their own.

Borrowers often mistakenly believe that a 20 percent down payment is necessary before they can buy a home. Purchases with lower down payments have become more common as higher home prices make it more difficult to come up with the necessary funds to meet the 20 percent threshold. The National Association of Realtors, in its annual Profile of Home Buyers and Sellers released in October 2016, determined that the average first-time buyer made a down payment of 6 percent for the third consecutive year while the average repeat buyer made a down payment of 14 percent for the third time in four years.

There are certain advantages to making a 20 percent down payment, including the elimination of private mortgage insurance, lower monthly payments, and the possibility of a better mortgage rate. Hal M. Bundrick, writing for the financial site NerdWallet, says the size of the down payment should depend on your finances and circumstances, including how long you plan to stay in the area. Your down payment should also leave enough money to account for closing costs, new furniture, and other expenses related to buying a home.

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