While interest rates continue to hover near record lows, many of today’s first-time home buyers may find it difficult to come up with the money required to purchase a property.
At the end of the day, a low interest rate can only provide so much access to homeownership.
The prospective buyer still needs a down payment in most cases, and with home prices on the rise, it’s becoming more difficult each and every day.
Sadly, it is the lowest priced homes that have seen the biggest jump in median down payment, per new data from Redfin.
The company reported that the median down payment for the cheapest 25% of homes was 7.5% in 2013, up from a 4.2% average seen during 2001 to 2007. That’s nearly a 79% increase.
Last year, the median down payment for these homes was $9,480, compared to just $6,037 in 2007.
During the crazy years, 2006 for example, the median down payment on that subset of homes was just 3.1%. And many put nothing down at all.
Conversely, the median down payment for the middle 50% of homes rose from 8.2% in 2001-2007 to just 8.8% last year, a mere 7.3% increase.
For the highest 25% of homes, the trend was similar, just a 10% rise from 19% to 20.9%.
Why Are the Low Priced Homes Bearing the Brunt of It?
Well, it’s simple really. Many of the cheaper homes that aren’t paid for with cash tend to be financed with small down payments.
Prior to the housing collapse, zero down was the way to go, even for more expensive homes. But once lenders got serious about underwriting again, borrowers were putting down 3.5% via FHA loans.
Unfortunately, the FHA has become a very expensive option for today’s homeowner thanks to ever-rising mortgage insurance premiums, meaning some of these home buyers are instead forced to go the conventional route.
Most conventional loans now require at least five percent down (there are exceptions), which partially explains why the median down payment has jumped so much.
For more expensive homes, well-to-do buyers often put down 20% or more to avoid paying PMI and to get a more favorable interest rate.
So the impact of the FHA’s recent changes hasn’t deterred these buyers much if at all because they were never going to use the FHA to begin with.
How Higher Home Prices Can Hurt Even If Rates Are Low
Let’s assume today’s home buyer has to bring in 5% instead of 3.5%, and deal with a higher home price to boot.
A couple years ago our hypothetical home sold for $200,000. Today, the price tag is closer to $250,000.
In the past, only $7,000 was needed to buy the $200,000 home with an FHA loan. And the borrower didn’t have to worry about paying MIP for life!
Today, they’d need to come up with $12,500 for the same home, nearly double the amount previously required.
At the same time, their monthly mortgage payment might only be a $100 or so higher thanks to the low rates available.
Many people can probably afford to pay another $100-200 a month on their mortgage, but not everyone has another $5,000+ lying around to put down on a home purchase.
Making matters even worse is the fact that bidding wars often favor those who can come up with a larger down payment, meaning today’s prospective buyer with little set aside might have to continue renting.
The good news is that today’s homeowner actually has skin in the game, meaning home prices will have more of a buffer than they did prior to the most recent crisis when walking away was a lot easier to do.