As housing costs have continued to grow faster than the average buyer’s income, more are tapping into resources that can lower the substantial up-front costs of purchasing a home. But that could bring some major changes and a degree of uncertainty to the housing market.
According to the latest quarterly report from the U.S. Census Bureau, homes sold to FHA borrowers comprised almost 18 percent of all home purchases in the second quarter of 2019. That represents a 60 percent increase in the market share of FHA loans since last year, when FHA loans made up only 7.3 percent of new loans.
FHA-backed mortgages are only one of the most popular and widely available down payment assistance programs out there. Research from Down Payment Resource, an Atlanta-based company that tracks more than 2,500 different homeownership support programs around the U.S., estimated that the vast majority of them (72 percent) focus on down payment or closing cost assistance. However, Down Payment Resource found that fewer of these programs are adequately funded today compared to last year. This could be due to high, sustained demand: Past research from Freddie Mac found that the use of down payment assistance among homebuyers doubled between 2013 and 2016.
With the help of these programs, the once-standard 20 percent down payment has become increasingly rare. Data released last year by the National Association of Realtors found the median down payment on a home purchase had fallen to 13 percent, or as low as 7 percent for first-time buyers.
While down payment assistance can take many forms, all of them helpful to cash-strapped buyers, they are not without risks. That’s because these programs usually shift the cost of a down payment or closing fees to later on, resulting in higher monthly payments once the buyer moves in. Also, there are often premiums such as private mortgage insurance tacked on, or buyers may have to pay off a second loan structured to cover their down payment.
In any case, the drawbacks associated with down payment assistance involve the risk of a much higher debt load that takes longer to pay off. That can leave borrowers susceptible to falling into negative equity, should their home’s value fail to rise in the near-term. Lenders often see these borrowers as riskier clients as well — programs like FHA-backed mortgages come with a higher risk of default than conventional loans, likely because FHA buyers are less wealthy to begin with.
“Someone who can’t come up with a down payment is far more likely to be living paycheck to paycheck,” said John Burns, founder of John Burns Real Estate Consulting, in a Wall Street Journal article about the growing concern surrounding FHA loans. In March, the Department of Housing and Urban Development, which administers the FHA mortgage program, said it was looking to tighten the requirements around who can receive assistance, in response to growing default rates among FHA borrowers.