Down Payments: Today's Most Persistent Misconception about Mortgages
Today's consumers persistently overestimate the size of a down payment they need to finance a home. Just how deep-rooted the myth of the large down payment is was made plain in some recent research from Zelman & Associates in New York, which found respondents, on average, believe lenders require equity of 11 to 15 percent.
Zelman's survey of renters and people living in someone else's house is revealing. It's a wakeup call to the housing industry that we have more to do to let the next generation know they can get a conforming, conventional mortgage with a down payment of as little as 5 percent (sometimes with as little as 3 percent coming out of their own pockets).
According to Zelman's findings, 39 percent of those surveyed estimated the minimum down payment requirement is at least 15 percent of the purchase price. This includes large percentages of people who should be in their prime homebuying years. Specifically, 38 percent of 25-29 year olds and 42 percent of 30-34 year olds said lenders demand minimum down payments of 15 percent.
Zelman also reported that "only 28 percent (of all respondents) were optimistic that they could qualify for a mortgage. This includes 30 percent of 25-29 year olds and 40 percent of 30-34 year olds." That would mean 60 to 72 percent of the traditional "first-time" homebuyer demographic may be underestimating their potential for getting a conforming, conventional mortgage with a low down payment.
Freddie Mac's purchase of mortgages with down payments under 10 percent more than quadrupled between 2009 and 2013. The latest statistics for 2014 are also encouraging. They show more than one in five borrowers who took out conforming, conventional mortgages this year put down 10 percent or less.*
Letting more consumers know how down payments are determined could bring more qualified borrowers off the sidelines. Depending on their credit history and other factors, many borrowers can expect to make a down payment of about 5 or 10 percent. (It's important to note that borrowers putting down less than 20 percent will need to buy mortgage insurance.)
Bridging the Down Payment Gap
Qualified borrowers can further reduce the down payment coming out of their own pockets to 3 percent by lining up gifts from family or grants or loans from non-profits or public agencies. Every state in the union, and many cities and counties, offers practical down payment assistance programs for qualified borrowers. Examples include the American Dream Downpayment Initiative and HOME Investment Partnerships Program. (For more information, see Down Payment Assistance on FreddieMac.com.)
Right now, free borrower seminars, counseling sessions, and education events are being held around the country to get out the word about these opportunities. For example, on June 21 and 22, Freddie Mac is teaming up with organizations in North Carolina to hold a major housing fair for the soldiers and military families at Fort Bragg in Fayetteville. (June, after all, is National Homeownership Month.)
The housing industry's challenge is to truth-squad borrower misconceptions about down payments and make sure they know how to hold down the out-of-pocket cost of buying a home.
With mortgage rates still near historic lows, new homeownership opportunities are poised to grow. The challenge is finding those who don't realize they can afford to finance a home and showing them how they can.
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