Home Loan Down Payments Are in Decline: Will Uncle Sam Ride to the Rescue?

President-elect Donald Trump has enough problems on his hands as his administration takes shape, with the economy, health care, geopolitical strife and a divided country all on his plate.

Chances are, dealing with a weakening real estate market, especially related to lower down payments, hasn't entered his mind.

According to the November Down Payment Report, from Down Payment Resource, median down payments from first-time home buyers fell to just 4% of the home's value, down from 6% in 2015. At the same time, home down payments for FHA-backed loans are also at 4%, signaling that homebuyers aren't saving enough for home down payments, and thus face higher monthly mortgage payments.

There's one school of thought that says homebuyers aren't putting serious money down on a purchase, because they don't have to.

"U.S. homebuyers are putting less down to purchase homes due to the wide availability of low- and no-down payment loans such as FHA loans, Fannie Mae's HomeReady program, a resurgence of 'piggy-back mortgages' and other programs," says Erin Sheckler, president of NexTitle, a full-service title and escrow company located in Belleview, Wash. "Meanwhile, USDA and VA loans also do not require any down payment whatsoever."

Sheckler also notes that lending requirements have begun to ease nationwide, thus giving homebuyers more wiggle room with home down payments. "According to Ellie Mae's Origination Insight Report, in August, home buyer down payments varied by loan program but, in nearly all cases, down-payments were near minimums," says Sheckler.

Sheckler also doesn't expect the low down payment trend to end anytime soon.

"How much money a person decides to put down on the purchase of a new home is a combination of risk and personal tolerance as well as the loan programs available to them," she says. "As long as mortgage guidelines remain relaxed and with first-time homebuyers being an increasing segment of the market, we will likely see down-payments hover around the minimums into the near-term future."

The risk with lower home down payments is real, however. "No one wants to find themselves house-poor," Sheckler adds. "Being house-poor means that the majority of your wealth and monthly income is tied up in your residence. This can be a catastrophic situation if you find yourself suddenly faced with a loss of income or unexpected expenses."

Homebuyers looking for more help from Uncle Same, though, may come away disappointed in the next four years. "While Trump has been pretty silent on the housing market, (vice president-elect Mike) Pence and the Republican party platform have made it clear that they want to reduce the federal government's footprint in the housing market," says David Reiss, professor of law at Brooklyn Law School. "This is likely to mean fewer low down payment loan options being offered by Fannie Mae, Freddie Mac and the FHA."

The low down payment issue is particularly egregious for millennials, who make up the bulk of first-time homebuyers.

"With rising home prices, a 20% down payment is rising, too, and Millennials are finding that they are graduating from college into a job market with low wages while carrying a heavy student loan burden," states Casey Fleming, a mortgage advisor and author of the book The Loan Guide: How to Get the Best Possible Mortgage.

"First-time home buyers have a lot less money than they did a generation ago, and have to be a lot more committed than they did before," Fleming says.

Fleming also notes that mortgage lenders are "fine" with changing market conditions.

"They are simply adjusting their guidelines and practices," he explains. "It's worth noting that default rates are now close to the norm before the financial crisis, so clearly the low down payments are not affecting the quality of mortgage loan pools."

Other mortgage experts note that the 2007-2008 housing crisis wasn't caused by low down payments, but by poor underwriting practices.

"As long as we continue prudent underwriting, low down payments will not be threatened," says Bruce Ailion, a realtor and attorney at RE/MAX Greater Atlanta. "The last crisis was not caused by low down payments it was caused by poor underwriting. Liar loans, teaser rate loans, negative amortization loans, sub-prime loans were the problem."

"Going forward, down payments should be eased and loan underwriting strengthened," he adds.

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