In a shift away from the ultra-conservative lending standards that have prevailed in recent years, banks are increasingly allowing homebuyers to obtain mortgages with small down payments – sometimes as low as only five percent.
In the years immediately preceding the collapse of the housing market, getting a mortgage with no down payment was a fairly common practice. In some cases, banks didn’t even require borrowers to document their income as part of the process of obtaining a home loan. But by 2008, the pendulum had swung in the other direction – suddenly, lenders began requiring near-perfect credit and a hefty down payment in order to secure a mortgage. It seems that many banks recognized the role that generous lending standards played in the housing crash and were committed to correcting the problem.
But now it seems that banks are once again softening up their stance on down payments; according to CNN Money, several big banks - including Wells Fargo, Bank of America and TD Bank - are back to offering mortgages with as little as 5% down. This represents a huge change from just a few years ago, when buying a home meant putting down ten to twenty percent.
It seems that banks’ increased willingness to lend to those who can’t afford huge down payments is the result of changes at the Federal Housing Authority (FHA). The FHA had historically been the lender of choice to borrowers with poor credit and/or very little in the way of a down payment. But interest rates on FHA loans are higher than those of conventional mortgages, and recent changes to FHA mortgage guidelines now force borrowers to take on private mortgage insurance (PMI) for the duration of their loans. PMI usually costs $100-$200 per month, so this is a significant expense. Because borrowers aren’t as enthusiastic about FHA loans as they used to be, traditional banks are finding it easier to encroach on their customer base.
It should also be mentioned that housing prices have been on the rise this year, which is also contributing to big banks’ comfort with the idea of allowing borrowers to put less money down. With homes gaining and retaining value, less money down represents less of a risk than it did when housing prices were volatile.
How much did you put down on your home?