The Return of Low Down Payment Mortgage Loans
For better and for worse, the low down payment loan has returned. I am seeing them more often in my practice, and numerous publications have discussed the return of low down payment loans. The latest? Joe Light of The Wall Street Journal authored “Low Down Payments Pick Up – to the Chagrin of Some.”
The good side? First-time homebuyers make up a big part of these new low down payment borrowers. They buy starter homes, which allows starter home owners to move up to larger homes, which allows those owners to move up… This also decreases property’s time on market which leads to increasing home values. It’s a virtuous cycle which benefits all concerned…
…assuming people aren’t biting off more than they can chew. That’s the bad side. Bad loans given to people who never should have gotten them in the first place played a huge role in the late 2000s financial crisis. Buyers using these low down payment loans also need to consider higher payments, fees, and the need for private mortgage insurance.
Thankfully, subprime loans are still mostly a thing of the past. Though low down payments are back, good credit is still the rule.
What does this mean to buyers? It means that there are more options for responsible borrowers with good credit. While 20%+ down is still a sound idea, it is possible to go as low as 3% down or even 0% for US military veterans and for rural home buyers. However, buyers who want low down payments ought to carefully weigh the benefits and risks of these loans. They should also recognize that some sellers will weigh their down payment against competing offers. Further, some sellers will view government-backed loans (FHA, VA, and USDA) negatively due to the additional headaches involved.
What does this mean for sellers? Believe it or not, low down payment buyers are a double-edged sword for you too! On the good side, the return of low down payment loans means more buyers and eventually a higher price as competition increases for your property. On the bad side, a low down payment buyer is more likely to fail. Low down payments generally mean tight finances. This translates to buyers requesting closing cost assistance, more repair demands (the buyer can’t afford to fix problems), and a bank more likely to pull the plug on a loan for the slightest buyer misstep or problem. Federally-backed loans such as FHA, VA, and USDA loans also come with additional headaches such as government inspections, fees, and paperwork.
Is the return of low down payment loans good or bad? In truth, it’s both. But since they’re here again, buyers and sellers need to seriously consider their benefits, drawbacks, and effects on their transactions.
Do you have questions about low down payment loans, or about mortgage loans in general? I can introduce you to quite a few mortgage brokers who can answer your questions. Please email or call me; I’ll be happy to help introduce you to the right people.