Where you put down roots says a lot about you. Suburb vs. city; condo vs. single-family house—these are all decisions that home buyers tackle, and what they decide speaks to who they are. Also telling is how much they can afford to put down on that house.
It seems that as the housing market corrects, buyers are increasingly opting to put down more money despite programs touting the opposite.
RealtyTrac, a real-estate industry data provider, analyzed down payments of nearly 20 million home purchase loans from 2004 to 2014 and found that today’s postrecession buyers have cash reserves and don’t really need low-down-payment loans to buy.
In fact, just 25% of buyers in 2014 put down 3% or less using an FHA or conventional loan combined with down payment assistance, according to the report. That may seem like a significant percentage—a full quarter of buyers!—but it’s the lowest rate in a decade. Low-down-payment loans peaked in 2009, taking 46% of market share, according to the report. Since then, they have been steadily losing favor—and for good reason.
Low-down-payment loans tend to be more expensive. FHA loans have upfront fees, as well as monthly mortgage insurance premiums. And in a climate of consistently low interest rates, low-down-payment loans tend to carry a higher-than-average rate. As the credit market tightened, banks turned their favor to only the most highly qualified applicants.
Last year, the average repeat home buyer was a married couple with a median household income of $95,000, according to the National Association of Realtors®’ annual profile of home buyers and sellers. These move-up buyers can sell their homes and use the profit to make a larger down payment.
While this might sound like the perfect home-buying cycle, it tends to leave out single people and first-time buyers—groups that traditionally have lower incomes and less savings. To be sure, the level of first-time buyers has shrunk to 30% in 2014 from 40% before the housing market collapse, according to NAR.
That may also have something to do with tighter lending restrictions. Only the most highly qualified buyers are being approved for loans. Last month, for instance, the average home buyer had a 731 FICO credit score, according to Jonathan Smoke, chief economist atrealtor.com. For conventional loans, the average home buyer had a 751 FICO, while for FHA loans it was 682.
Translation: The mortgage market has basically been skimming from the top.
Even though Fannie Mae and Freddie Mac provide guidelines for consumer loans, banks have created overlays that further restrict access to credit. While FHA might allow low-FICO loans, good luck finding a bank that’ll write that loan.
These days, buyers with less than stellar credit fear applying for a mortgage given today’s tight credit restrictions. While buyer pessimism may contribute, there might be another reason down payments are getting higher.
“If you’re a seller and you have to chose between two offers, one with a low down payment and the other with 20%, you’re going to take the stronger offer,” said Adam McLain, a mortgage broker at Wintrust Mortgage in Chicago. “That larger down payment sways sellers.”
The average down payment in 2014 was 15.4%, according to RealtyTrac, down slightly from 15.6% in 2013. Down payments hit an 11-year low in 2009 when they averaged 12.9%, according to the report, which comes on the heels of Fannie Mae announcing that it would start allowing 3% down loans. Freddie Mac will start accepting 3% down loans next month.
Take the average purchase price of $291,428, and in 2014, the average buyer brought $58,496 to the closing table, according to RealtyTrac.
The lower the price of the home, the lower the down payment tends to be, according to the report. The average sales price for a house with a 3% down payment was $154,214. On the other end of the spectrum, borrowers who purchased $500,000 houses tended to put down 50%.
To industry experts, the down payment’s relationship to home price is not surprising.
“Nonconventional loans like jumbos often require more than 20% down,” said Smoke. “So if the market has shifted to higher price points, which it has, and higher income, more qualified buyers, which it has, then of course the down payments would be going up.”
Still, in order for the housing market to fully recover, all qualified buyers have to participate—and that means lenders will have to embrace a wider pool of applicants.