More lenders allow smaller down payments
As home values rise, conventional lenders are giving mortgages to homebuyers with smaller down payments and lower credit scores.
There’s a spring thaw under way, and we don’t mean just melting snow.
For the first time since the real estate bust, lenders are beginning to loosen the purse strings and give mortgages to more borrowers with less than 20% down and who don’t have perfect credit.
The Federal Housing Administration has taken a bigger share of the mortgage market in the past five years, since it backs loans to borrowers with lower credit scores and allows down payments as low as 3.5%.
Now conventional lenders are lowering down payment rules and credit score requirements – though not necessarily for the same loans. Some are even allowing the 80/10 (or 15) piggyback loans that allowed borrowers to borrow 80% of the home’s value with a 30-year mortgage and then get a line of credit for the rest of the loan, avoiding private mortgage insurance.
"For years, it's been FHA or nothing," Guy Cecala, publisher of Inside Mortgage Finance, told USA Today. "This shift is a sign that mortgage origination is loosening up."
Many would-be homebuyers have been shut out of the market over the past five years because they didn’t have 20% for a down payment or a credit score of at least 760.
"That is phenomenally tough underwriting," Cecala told the New York Times. "Now, what you are seeing is that lenders are willing to tinker with one element at a time. So if someone is putting at least 20% down, they will go down to 720. And if someone has a 760 or a 780 credit score, they might be willing to go up to a 95%."
An article in USA Today lists three reasons for the mortgage thaw:
- FHA loans now cost borrowers twice as much in fees as they did a few years ago. The latest increase came April 1.
- Private mortgage insurance, required by Fannie Mae and Freddie Mac when a buyer puts down less than 20%, is more available, so more lenders are willing to make mortgages with lower down payments.
- Home prices are rising. That makes lenders more comfortable with lending a larger percentage of a home’s value.