CHARLOTTE, N.C. – April 17, 2013 – Lenders are warming up to home shoppers lacking big downpayments as the housing market improves, new data show.
In the first quarter of this year, 19 percent of conventional loan offers made by lenders on the LendingTree online exchange were for loans with downpayments between 5 percent and 10 percent, LendingTree says.
That was up from 6 percent of offers the same time last year and just 1 percent of offers two years ago, LendingTree says.
Meanwhile, the number of lenders quoting non-Federal Housing Administration loans with 5 percent to 10 percent downpayments on Zillow Mortgage Marketplace is almost double what it was two years ago, Zillow says.
The growth of the availability of low-downpayment loans is notable in that, following the housing bust, those consumers had little choice outside of generally higher-cost loans from the FHA. “For years, it’s been FHA or nothing,” for the low-downpayment borrower, says Guy Cecala, publisher of Inside Mortgage Finance. “This shift is a sign that mortgage origination is loosening up.”
But the industry is still a long way from the easy-lending standards that caused the housing bust. Borrowers now must show a strong credit history and documented income to get loans, Cecala says.
Several factors are driving more low-downpayment loans outside of the FHA, including:
• Higher FHA costs. While the FHA requires just 3.5 percent down, its annual insurance premiums have more than doubled in the past two years. The last increase took hold April 1.
The higher costs are “causing a shift back toward conventional loans,” says Cameron Findlay, chief economist at Discover Home Loans.
Following the latest rate increase, FHA applications for home loans fell by almost 14 percent for the week ended April 5 while applications for conventional loans rose more than 5 percent, the Mortgage Bankers Association says.
• A rebounding private mortgage insurance industry. Lenders generally don’t make loans that they can’t resell to mortgage giants Fannie Mae or Freddie Mac. While Fannie Mae will buy a loan with as little as 3 percent down, and Freddie Mac at 5 percent, loans with less than 20 percent down require borrowers to also get private mortgage insurance.
When the housing market crashed, the private mortgage industry lost billions and such insurance was tough to get. Now, the industry is on the rebound and the cost for insurance for borrowers with higher credit scores has dropped. As such, more home loan borrowers are finding it a better financial move not to put 20 percent down and instead pay for the insurance, says Matt Johnson, loan officer at Sterling Bank in Seattle.
Rising home prices have also helped lenders get more comfortable with low-downpayment loans.
The growth of lower downpayments is also reflected in Fannie Mae’s portfolio. In the first quarter of 2012, downpayments between 3 percent and 10 percent accounted for 15 percent of Fannie’s home purchase loan business. That rose to 18 percent in the third quarter.
The borrowers are still high quality. Last year, home loans acquired by Fannie Mae with less than 20 percent downpayments originated from borrowers with an average FICO score of 755, Fannie Mae says. Scores of 740 or higher are generally needed to get the best pricing on home loans.
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