A 20% down payment is no longer the norm. In the past year, 1.5 million borrowers purchased their homes with down payments of less than 10%, according to Black Knight Financial Services. That marks a seven-year high.
A growing number of home shoppers are financing more than 90% of their home purchase.
“The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low down payment loans have ticked upward in market share over the past 18 months as well,” says Ben Graboske, executive vice president at Black Knight Data & Analytics. “In fact, they now account for nearly 40% of all purchase lending.”
The study showed that the segment with the largest growth in low down payment levels has been from purchasers making a 5 to 9% down payment.
Also, Graboske notes that the low down payment loans of today are nothing like the ones that were blamed on causing the housing crash. Half of all low down payment loans at that time were second loans or called “piggyback loans.” Today’s mortgages are mostly single, first liens, Graboske notes. The loans of the past also were mostly adjustable-rate mortgages, which are virtually nonexistent among low down payment mortgages today, according to the Black Knight report.
Instead, most of the loans issued nowadays are fixed-rate. Borrowers’ credit scores are also about 50 points higher than those between 2004 and 2007, according to Black Knight.
The growth of low down payment loans has mostly been triggered by new programs offered by mortgage financing giants Fannie Mae and Freddie Mac, which brought back 3% down payment loans in 2014. They require borrowers to pay mortgage insurance, just like the FHA does.
So far, defaults on recent low down payment loans have been modest, Black Knight reports. But economists note that’s mostly because home prices are rising fast and borrowers have been gaining equity quickly.
If home prices should make a U-turn, the risk to borrowers and banks will rise. Borrowers with less equity in their homes default on their mortgages at a much higher rate than those with more skin in the game.