Mortgages Suffer from Misconception about Down Payments
From DSNews.com 6/16/14
There’s a pervasive view held by younger consumers when considering whether to purchase a home or not, according to Freddie Mac’s Christina Boyle. She believes that consumers persistently overestimate the size of a down payment they need in order to finance a home, and this lack of education is harming the housing market.
She cites a Zelman & Associates research study that found respondents, on average, believe lenders require a down payment of at least 11 to 15 percent.
Boyle believes the survey is a “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).”
The study found that 39 percent of respondents believe that the minimum down payment required is at least 15 percent of the purchase price. Particularly problematic for Boyle is that this percentage include a large population of people who are 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,” Boyle said. Even more troubling, the survey found that only 28 percent of respondents were optimistic that they could qualify for a mortgage, which includes 30 percent of 25-29 year olds and 40 percent of 30-34 year olds.
This means that roughly 60 to 72 percent of first-time homebuyers don’t believe they can get a mortgage and are underestimating their potential for qualifying for a conforming, conventional mortgage with a low down payment.
Boyle wishes to dispel this myth. She commented, “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.”
She does rightly note that borrowers putting down less than 20 percent will need mortgage insurance, but education and financial counseling can bring “more qualified borrowers off the sidelines.”
“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,” she concluded.
~Don’t be afraid to ask questions. FHA generally requires 3.5% down payment, on a $200,000 that is $7000 down. Conventional generally requires 20% down payment, on a $200,000 that is $20,000 down. If you can qualify for either loan weigh your options, if you have enough for 20% down, your payments will be $810/mo with interest rate of 4.5%* on a 30 year loan. For FHA that would be $977/mo with interest rate of 4.5%* on a 30 year loan. Also you could have the money and instead would like to invest it in the home when you purchase whether it be furnishings, landscaping or small renovations you just have to decide what will best fit your family.~
*current interest rate is hovering around 4.5%. Get current rates from your lender for more accurate information