February 28th, 2017 5:05 AM by Jackie A. Graves, President
When it comes to mortgages, there’s a big gap between what
people think they need in order to get one and the
reality of what buyers are successfully doing—especially young people.
I know, I know, I’ve written on down payments before (like last
month, when I highlighted that putting 20% down
isn’t the norm).
But you know what? When it comes to what might be the biggest
purchase of your life—one that can be incredibly intimidating for first-time
buyers—it’s nice to know real facts. And in the mortgage market,
reality is very often different from perception. Or, for that matter,
Last week, the National Association of Realtors® issued its 2017
Aspiring Home Buyers Profile report. The report cites data from
surveys taken in the third quarter of 2016 about down payments.
The report summarized that 39% of nonowners believe they need
more than 20% for a down payment on a home, 26% believe they need to put down
15% to 20%, and 22% believe a down payment of 10% to 14% would work.
So on average, those nonowners thought a down payment would need
to be about 16%. The reality? The average down payment on purchase mortgages in
2016 was 11%.
In fact, when we drill into the purchase mortgages taken out by
people under 35, who represent the majority of first-time buyers, we see the
average down payment was even lower, at just under 8%. In other words, aspiring
first-time buyers think it takes twice
as much to buy a home
than it really does.
But averages can be misleading, right? Especially when there is
a wide distribution, like we observe with down payments. When we dig into what
actually happened in 2016 we find that most young people buy homes with … less than 5% down. That’s less than one-third of
what the average nonowner had assumed!
As with many things in life, the most correct answer to the
question of how much you need to put down is “it depends.” There are a slew of
important factors like who you are, your financial circumstances,
the home’s location, and the price of the home.
It is possible to buy a home with a mortgage with no money down. VA and
USDA loans are the most popular loans that offer the ability to put no money
down. In 2016, 16% of buyers under 35 put no money down.
The largest share (36%) of loans for buyers under 35 in 2016 was
for people putting down something less than 5%. The options there include loans
offered through the U.S. Department of Veterans Affairs and the U.S. Department
of Agriculture, but also 3% down payment programs backed by Fannie Mae and
Freddie Mac (aka conforming loans). And, of course, this includes the
traditional 3.5% FHA mortgage that is primarily targeted to first-time buyers.
More than half of young people who successfully bought a home
with a mortgage in 2016 put at most 5% down. The average dollar amount for
these buyers was $3,500. That’s right, if you have #FOMO from your friends
buying homes, the majority of them are putting down just a few thousand
How are they doing it? The aforementioned mortgage products
(conforming, FHA, VA, and USDA) represent almost 99% of the mortgages to people
under 35 in 2016. There is nothing exotic about this.
And it doesn’t require perfect credit, just fair credit. The average
FICO was 713, and the floor we observed in FICOs (below which very few
mortgages were made) was 639.
Put that all together and you can see that for the millennial
dreaming of buying a home this year, you need a FICO score of at least 639 and
enough money that you could put down at most 5%. If you live in a typical
American town, what you need could be as little as $3,500.
sounds a lot more attainable than most people think. The truth is out there!
Take advantage of it.
By Jonathan Smoke - To view the
original article click here