What’s Up With Down Payments

Posted by ForSaleByOwner Staff

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Down payments aren’t what they used to be – five years ago or ten years ago. Zero down payment loans have nearly evaporated, but instead of simply going back to the longstanding rules of thumb, lenders have adopted a new set of guidelines.

The bottom line going into 2012: Even for the lowest, FHA down payment of 3.5%, you will need an additional 2% to cover fees. Keep reading for a checklist of closing costs that increase the cash you must bring to closing.

Ten percent is the new threshold, says Keith Gumbinger, vice president of mortgage information service HSH.com.  And it’s just as hard for first time buyers to achieve that as it was for them to get to 20% two decades ago.  Earnings have been flat to declining, while rent, utilities, health care and other costs of living have continued to rise. So while the declining value of real estate has actually lowered the bar, other factors have pushed it right up again. And mortgage insurers, gun-shy from their huge recent losses, rarely compromise on the 10% minimum down.

But most first time buyers put about 5% down, according to the National Association of Realtors 2011 Profile of Home Buyers & Sellers. Repeat buyers, pooling equity with savings, typically put down about 15%. The median down payment for all buyers was 11%.

Last year, over half of first time buyers turned to the  Federal Housing Administration’s loan program, according to the National Association of Realtors. FHA loans start at 3.5% for borrowers with credit scores of at least 580. Those with credit scores below 579 must put at least 10% down. To bolster its own insurance reserves, the FHA has been increasing its mortgage insurance rates. Currently, says Gumbinger, the cost is 1% of the loan amount to simply get going, then an annual payment of the same.

New and bigger fees are also crowding onto the closing table. Fees are based on the “intersection of your loan amount and your credit report” says Gumbinger.  Lenders will advertise the best-case-scenario but often, individual circumstances don’t always fit that low-cost promise. And with all the brouhaha about shoddy mortgage servicing, lenders are revamping their procedures. That costs money, and they get that money by layering on additional closing and loan processing fees.

The bottom line going into 2012: Even for the lowest, FHA down payment of 3.5%, you will need an additional 2% to cover fees, recommends Gumbinger.

ON TOP OF THE DOWN

Closing costs include more than the down payment. Here’s a list of the fees and expenses you’ll need to bring to the table.

  • Down payment
  • Mortgage insurance fee or point
  • Loan documentation fee
  • Loan processing fee
  • Points (a fee tied to the amount and rate of the mortgage)
  • Transfer or delivery fees
  • County/municipal transfer taxes