We’ve written in the past about the expansion of low-down-payment mortgage programs for borrowers in Washington and Oregon. In recent years, policy changes made by Fannie Mae and Freddie Mac have enabled more home buyers to purchase a home with a down payment below 5% of the purchase price.
Now, a recent industry report shows that a growing number of home buyers across the country are benefiting from this trend.
Down Payments Below 5% on the Rise
In a June 2018 blog post, the property data company CoreLogic published an in-depth analysis that showed an increase in the percentage of borrowers making down payments less than 5%.
Back in 2014, the overall market share of such loans was only 2%. It has since risen to 9%, as of the first quarter of 2018. This means that more and more home buyers are purchasing houses with down payments of less than 5%.
Terminology: A loan-to-value (LTV) ratio is a financial term used by lenders to show the ratio between the amount being borrowed and the home’s market value. A larger down payment results in a lower LTV ratio, and vice versa.
According to the CoreLogic report:
“…home-purchase loans with LTV ratio above 95 percent started to rise in early 2015 following the GSEs’ announcement. The share was less than two percent in 2014 but rose gradually and reached 9 percent in Q1 2018. The average LTV ratio for the home-purchase loans in Q1 2018 remained unchanged from Q1 2017 at 82 percent.”
Note: This analysis pertains to conventional mortgage loans in particular, which are those that can be sold to Fannie Mae and Freddie Mac. It does not include government-backed programs like FHA and VA. Conventional mortgage products account for roughly 70% of all purchase loans used by home buyers.
Conventional Loans Competing With FHA?
This trend is largely the result of changes made by Fannie Mae and Freddie Mac over the last few years. These are the two “government-sponsored enterprises,” or GSEs, that buy and sell home loans via the secondary mortgage market. The GSEs have certain requirements for the loans they can buy, and those requirements affect home buyers who are using a conventional mortgage to buy a house.
In recent years, Fannie and Freddie began to accept mortgages loans with down payments as low as 3%. This expansion would seem to put them in direct competition with the FHA loan program, which allows borrowers to put as little as 3.5% down when buying a house.
FHA’s market share has shrunk a bit in recent years. And this could be partly due to the easing of down-payment requirements on the conventional side.
In early 2015, home loans insured by the Federal Housing Administration accounted for around 15% of overall market share. According to the latest data from the Mortgage Bankers Association, the FHA’s share of total loan applications was down to 10.1% as of June 2018.
Here’s the big takeaway for home buyers in Washington and Oregon:
There are more options available today for borrowers seeking a down payment below 5%. The FHA loan program has long offered a path to homeownership with a minimal upfront investment. But in recent years, there has also been a rise in conventional mortgage loans with down payments less than 5%.