May 24th, 2019 8:50 AM by Jackie A. Graves, President
Soaring home prices have made it harder for
potential homebuyers to save for a down payment in recent years. Incomes
haven’t kept up with the explosive increase in cost of living – both in rents
and home prices – and that’s prompted buyers to rely more on unconventional
avenues for finding down payment cash.
In fact, more
borrowers are turning to first-time homebuyer down payment assistance loans or grants for
help. In 2013, 5 percent of borrowers used a loan or grant from a government or
nonprofit agency to fund their down payment and by 2016, that share had surged
to 10 percent, according to new analysis from
the National Survey of Mortgage Originations and internal data from Freddie
Mac. The survey is jointly paid for and managed by the Federal Housing Finance
Agency (FHFA) and Consumer Financial Protection Bureau (CFPB).
assistance programs are typically offered by state or local housing agencies.
The financial assistance comes in the form of grants that don’t require
repayment or low-interest loans with deferred repayment to cover down payment or closing costs. In many cases, these grants or
loans have income limits and are available to first-time buyers only, although
many programs can benefit those who haven’t owned a home in at least three years.
share of homebuyers who used a gift or loan from a relative or friend remained
stable over the same time period at nearly 25 percent, Freddie Mac reported.
The compositional shift in who’s buying homes is one reason why down payment
assistance programs have gained popularity in recent years. First-time
homebuyers tend to be younger people who typically have little cash savings and
lower incomes than older repeat buyers, says Len Kiefer, deputy chief economist
for Freddie Mac.
“In 2013, we
were still emerging from the downturn and the market was in the early stages of
recovery with mortgage delinquencies and the labor market was still struggling;
it was tough for housing,” Kiefer says. “Since then, the economy has improved a
lot and (buying) demographics have shifted toward first-time buyers.”
rise in younger, first-time buyers has driven up the demand for state and local
down payment assistance programs in recent years, it’s still a “modest share”
of the marketplace, Kiefer says.
(You can use
a mortgage down payment calculator to
figure out how your down payment amount will impact your mortgage payments.)
rely mostly on savings, but share has gone down
In 2013, 79
percent of homebuyers used money from their own savings, retirement accounts or
an inheritance to fund their down payment, according to Freddie Mac’s report.
By 2016, the share had plummeted to 70 percent.
higher home prices and somewhat higher mortgage rates than a few years ago,
it’s no surprise that homebuyers struggle to scrape together the cash for a
down payment. Of course, there are also closing costs to consider, which can
range anywhere from 2 percent to 4 percent of the loan amount. Plus, there are
moving costs and all the hidden expenses of homeownership, such as maintenance,
repairs and higher utility bills.
assistance programs you can qualify for to help fund your down payment and
avoid depleting your savings account to buy a home, says Jonathan Payne, vice
president of sales with American Financing, a national mortgage lender based in
not used to all the unexpected expenses (that come with homeownership) and you
put all of your money into the down payment, you can get yourself in a tough
situation,” Payne says. “Try to keep at least six months of cash reserves in an
emergency fund if you can.”
down payment programs are in high demand
housing crisis in 2008, lenders have increasingly added low down payment
mortgage programs to their offerings to expand mortgage credit to more people.
put as little as 3 percent down on conventional loans backed by Freddie Mac
or Fannie Mae. Bank of America and Chase have their own
low down payment mortgage programs, too, and other lenders are following suit.
Some government-insured loans require no money down while Federal Housing Administration, or FHA, loans require
only 3.5 percent down.
wide availability of these options, nearly a third of people planning to buy a
home in the next three years still think they need to put down more than 20
percent on a home, according to a recent Freddie Mac survey. Another 30 percent
of renters and nearly a quarter of existing renters and existing homeowners say
they don’t know how much money down lenders require.
seemingly stretched on affordability, lenders have to balance access to credit
and ensuring they’re not doling out risky loans. That’s why it’s important to
evaluate a borrower’s whole financial picture and not rely solely on formal
underwriting models, Kiefer says. Your credit score, debt-to-income ratio, down
payment and payment history are all important benchmarks for lenders to look at
when determining your ability to repay a mortgage, Kiefer says.
of millennial borrowers with older co-borrowers on their loan jumps
who may not have the income or pristine credit history to qualify for a
mortgage – or the loan amount they want – sometimes turn to another avenue to
get a mortgage: using a co-borrower or cosigner.
instances, the person co-borrowing or cosigning on the loan is equally
responsible for the mortgage. A co-borrower, however, has a shared financial
interest in the home. In the latter arrangement, a cosigner doesn’t expect to
make payments; that’s the primary borrower’s responsibility. Still, a cosigner
promises to assume responsibility for repayment if the primary borrower fails
to make payments on the mortgage.
In 1994, the
share of first-time homebuyers aged 25 to 34 who had a co-borrower aged 55 or
older on their Freddie Mac purchase loan was 1.3 percent. By 2018, that share
jumped to 3.2 percent, Freddie Mac reported. Meanwhile, the share of young
adult repeat borrowers with a co-borrower aged 55 or older was lower at 0.6
percent in 1994. However, that share also rose to 1.2 percent by 2018.
parent who has the income, assets and solid credit history to be a co-signer or
co-borrower on the loan can help young adults obtain a loan they’d otherwise be
unable to get. But it’s a risky move that can have unintended consequences,
says Payne, the American Financing executive.
“A lot of
parents don’t realize how much (responsibility) they’re obligating themselves
to,” Payne says. “Cosigning on a house is different than cosigning for a credit
card or a car. If their children can’t repay the loan and the home goes into
foreclosure, that delinquency goes against (the parent’s) credit and hurts
their financial future.”
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