April 8, 2015 Ralph Ragette

Based on information gathered from the REALTORS® Confidence Index Survey in the months of December 2014–February 2015, 66 percent of first-time homebuyers made a down payment of 0 to 6 percent. [1] Although this is a decline from the 77 percent figure in early 2009, this is an improvement over the 61 percent figure at the beginning of 2014.

REALTORS® have reported that the reduction in FHA’s monthly mortgage insurance premium (from 1.35 percent to 0.85 percent) is likely to help homebuyers. FHA insures loans that allow a 3.5 percent down payment. Fannie Mae and Freddie Mac have also reinstated the 3 percent down payment program early in 2015, and the down payment can all come from gifted funds. Meanwhile, 100 percent financing has always been available to members of the U.S. military and their surviving spouses.

A low down payment enables homebuyers to purchase a home sooner and start building equity rather than saving up for a few more years. However, a lower down payment may not necessarily make a home mortgage more affordable because of the effective increase in the mortgage rate arising from risk adjustment fees[2].  REALTORS® have reported that the increase in mortgage cost from the risk adjustment is blunting the intended effect of the GSE’s 3 percent down payment loan program.

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[1]               Based on the REALTOR® respondents’ most recent sales for the survey months, which altogether are viewed to be a representative sample of all sales for these months.

[2] GSEs charge fees on the amount of the loan for risk factors such as low down payment (loan level pricing adjustments or LLPA)[2]. On top of the LLPA, borrowers obtaining a loan with less than 20 percent equity also need to get private mortgage insurance.

Ralph Ragette

Ralph Ragette, Ragette Real Estate. Ralph is a 5th generation Realtor in Westchester County New York. His firm was started by his great-great grandfather in 1885.