Last week, the National Association of Realtors (NAR) argued that higher mortgage insurance premiums at the FHA have priced out scores of renters nationwide.
Long story short, FHA financing is generally the cheapest option around for those with little set aside for down payment, so the increase in premiums is shutting the only door to financing for this bunch.
And it’s not a small group of people – per the REALTORS® Confidence Index survey, 60% of first-time home buyers made a down payment of six percent or less as of February 2014.
The Average Renter Only Has $12,568 in Savings
Today, NAR followed up their argument with a nifty chart that details how much money a renter would need to save to buy a median-priced home.
It basically points to FHA financing as the only viable option for most would-be buyers.
According to the chart, the average renter only had $12,568 in savings last year. Unfortunately, the median-priced home in 2013 was $197,400.
When you throw in another three percent for closing costs, a renter’s median household savings only allow for FHA financing with the minimum 3.5% down.
That would set a renter back about $12,624, which slightly exceeds their total savings. But it’s a lot closer than any other option.
A five percent down payment plus closing costs requires $15,496, a 10% down payment + CC calls for $25,070, and the classic 20% down requires a whopping $44,218.
Note that home prices have risen steadily since 2013, so the numbers are probably even worse today, effectively eliminating conventional financing as an option.
However, it is possible to receive a gift for the down payment and/or closing costs, or to accept a higher mortgage rate in exchange for a lender credit to cover closing costs.
But this chart illustrates the “down payment challenge” that continues to hinder home buying for many Americans.
Most just don’t have enough money set aside to purchase a home, especially without FHA financing. This is further exacerbated by the fact that mortgage insurance premiums on FHA loans have surged in recent years.
The extinction of the 3% down payment mortgage (Conventional 97 loan) didn’t help either.
So Only Well-to-Do Renters Can Buy Homes Nowadays?
In areas where supply is low and demand is strong, it’s pretty tough for a renter with limited assets to purchase a home.
If they must rely upon FHA financing, there’s a good chance they’ll get outbid by another buyer who has more assets socked away.
After all, is the seller going to go with the 20% down buyer or the 3.5% down buyer who will exhaust his or her savings in the process?
Even if low-down payment mortgage financing is still widely available, it doesn’t make for a strong case, especially if there’s another prospective buyer in the mix.
So even if the FHA lowered premiums and raised loan limits, another area NAR and others are currently working on, it won’t do much good in many multi-bid situations.
But it is clear that down payment continues to be a roadblock to homeownership, with the only real solution lower home prices or higher wages.
Or a return to 100% financing, which we all know isn’t tenable just years after one of the worst housing bubbles in history.
Update: Congresswoman Joyce Beatty (OH-03) has introduced legislation that would lower upfront mortgage insurance premiums by 25 basis points (0.25%) for first-time home buyers who complete a HUD-certified housing counseling program.