Low Down Payments Can Help Borrowers AND LendersBy Rob Chrisman,
Rob Chrisman's Perspectives
A report out this month from Genworth Financial tells us that monthly mortgage payments for first-time homebuyers increased by 15 percent year-over-year from higher interest rates (up 8 percent) and higher home prices (up 6 percent). Why should the typical LO care? Genworth also pointed out that 80 percent of homebuyers use “low down payment” mortgages to finance their first home purchase. It is important for lenders to know some of the “behind the scenes” numbers in order to decide the best way to promote low down payment loans.
According to a recent survey from Zillow Research, it takes nearly a decade longer to save up a down payment for a home in San Francisco now compared with 30 years ago. Assuming people put aside 10 percent of their incomes in order to save up a 20 percent down payment, it would now take a median-income San Francisco buyer 8.5 years longer to come up with that initial chunk of cash to put down on a median-priced home. An hour south, in San Jose? Thirteen years longer for a median-income person to save up a down payment on a median-priced home in that market. Not far behind are Los Angeles (9.5 years longer), San Diego (7.3 years) and Seattle (6.1 years). And when you throw the expense of a college education and higher rents into the mix… it is tough to save money.
Things aren’t so bad in Texas, however. Those saving up a down payment in Austin, on average, can do it in two fewer years than in the late 1980s because median incomes have kept slightly ahead of median housing prices there. In Dallas and San Antonio, it will take a few months less to buy a home, and in Houston it will take a few months longer than it did in the late 1980s.
Lenders should know that perhaps this is changing. Dr. Matt Lind from the STRATMOR Group points out that, despite interest rates having moved higher, housing affordability has improved in recent months. From January 2018 through June 2018, the Housing Affordability Index, which measures the degree to which a typical family can afford the monthly mortgage payments on a typical home, declined from about 164 to 138, a 16-point drop. But starting in July, the index started to rise, and rapidly, reaching 146 in September 2018.
So although lenders have increased mortgage rates, it is important to remember that affordability also considers home prices. “No tree grows to the moon,” and indeed, house price appreciation has slowed or even fallen in many areas. For example, the median sales price of an existing home rose from $241,000 in January 2018 to $274,000 in June (up nearly 14 percent in six months), the median price dropped to $255,000 by October 2018 and appears to be on a continuing downward trajectory through winter and into the spring.
Down payments also matter. Lenders know that low down-payment mortgage programs and products exist (Housing Development Authorities/bond programs, Fannie’s Mae Home Ready, Freddie Mac’s Home Possible, and FHA). But survey data shows many borrowers don’t know they’re out there. Dr. Lind points out that, “Depending upon age group, between 35 and 45 percent of borrowers perceive that they will need a down payment of at least 15 percent. What is particularly surprising is that almost half of Gen X and younger Baby Boomers think that 15 percent is the minimum.”
Wannabe buyers may turn to parents for help. Or they can borrow more than 80 percent of the purchase price with a first mortgage and pay private mortgage insurance. They can borrow some of the down payment with a home equity loan or line of credit. Or they can go with a lesser-known option: giving up part of their future appreciation in exchange for down payment help from a government (down payment assistance program) or private-sector program such as Unison where there are no income restrictions and buyers don’t have to be first-timers, but they must live in the home, qualify for a loan and be in one of the 12 states (including California) where Unison operates.
Experienced loan officers know that the “seeds they plant” in the lull holiday period are the closings they reap in the Spring. LOs and lenders should be reminding real estate agent, and financial planning, clients, and potential borrowers that they don’t need to save up 20 percent of the possible purchase price to purchase a home. A lack of borrower education could be costing the mortgage industry significant origination volume at a time when the market is flat.