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NAR’s REALTORS® Confidence Index Survey data shows that fewer first-time buyers are obtaining mortgages with down payment of 6 percent or less [1]. In 2009, among REALTORS® who reported a sale to a first-time home buyer, 74 percent of these buyers put down 6 percent or less as down payment [2]. As of February 2014, this has fallen to 61 percent.
Along with the re-emergence of private mortgage insurance since 2011, REALTORS® have reported several factors driving this trend: tight competition for available properties, stricter underwriting standards, the higher cost of mortgage insurance at the FHA, as well as a reduction in the high-cost loan limits at which FHA can finance. With demand still stronger than supply across many states, a higher down payment enhances the likelihood of winning the bid and of obtaining a loan from the bank.
For buyers who can put down a higher down payment, doing so lowers the monthly mortgage insurance premium. For example, a house valued at the median price of $189,000 financed with an FHA-insured 30-year fixed mortgage at 3.5 percent down payment will require an upfront mortgage premium (UPMIP) of $3,191 and a monthly mortgage insurance premium (MIP) starting at $209 dollars [3]. A higher down payment of 22 percent will lower the UPMIP to $2,580 and the monthly MIP to $163. For conventional GSE-eligible loans, borrowers don’t typically pay mortgage insurance once the LTV reaches 80 percent. Combined with the lower monthly mortgage payments, the monthly savings from putting down a 20 percent D/P is about $226.
[1] This blog benefited from the comments of Dr. Jed Smith, Managing Director for Quantitative Research, and Ken Fears, Director of Regional Economics and Housing Finance Policy.
[2] NAR’s REALTOR® Confidence Index Survey asks respondents about the characteristics of the last sale for the month. The sample of last sales is assumed to be representative of the sales for the month.
[3] Assuming the UPMIP is also borrowed. FHA’s upfront mortgage insurance premium is 1.75% of the loan amount. For mortgages availed after April 1, 2013, the monthly insurance premium is 1.35% for a 30-year loan with loan-to-value of over 95 percent. http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf
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