The current housing market is ripe with opportunity. Interest rates remain low, credit availability is expanding, and employment is on the rise. For many hopeful homeowners, however, one hurdle they may not feel comfortable getting over comes in the form of the down payment. In fact, many buyers (and real estate professionals) believe that in order to purchase a home, a 20 percent down payment is necessary. Luckily, this long-held notion is untrue, but its widespread belief locks out potential homeowners who may have great credit and a steady income but do not have (what they think is) the cash needed for a down payment in their savings account.
Dispelling the 20 Percent Myth
According to the Q1 2015 U.S. Home Purchase Down Payment Report published by RealtyTrac®, the average down payment for single-family homes bought in the first quarter of 2015 was 14.8 percent, down from 15.5 percent in 2014. Further, in 2015, about 40 percent of homebuyers put down less than 10 percent, and nearly a third of the 1.6 million loans funded by Freddie Mac were for buyers putting down less than 20 percent.
As a real estate professional, dispelling that 20 percent myth is vital, as it opens up your business to an entire fleet of clients you may have previously believed were ineligible.
So what should you do when one of your clients may not have 20 percent of the purchase price for a down payment, but they have three to five percent?
Do your homework first. Find out if one of the lenders you work with offer mortgage loans that do not require a 20 percent down payment. Better yet, ask them if they offer the Freddie Mac Home Possible Advantage® mortgage, which is available to qualified borrowers with as little as 3 percent down.
Refer your client to that lender. Freddie Mac works with more than 3,000 lenders nationwide, so there’s a good chance that one or more of the lenders you work with offer Home Possible Advantage, although they may call it by a different name.
Make sure your client plans to live in that home. To qualify, your client must plan to live in the home they are financing, which nixes second homes and investment properties. Your client can also refinance their existing mortgage without taking any cash out. It’s available in 15-, 20- and 30-year fixed-rate terms.
Have them gather the funds. Although the down payment requirement for Home Possible Advantage is low, your client must still have the funds to cover the costs. The good news is that these funds do not need to be their own. According to a June 2016 Freddie Mac 55+ survey, over 20 percent of 55+ homeowners said they have helped family and friends with a down payment. Your client can also apply for Down Payment Assistance Programs with their local or state housing finance agencies. I do have a list of the housing finance agencies too.
Taking the time to educate your client is key, but you don’t have to do it alone. “Freddie Mac Borrower Help Centers and the Borrower Help Network (877-300-4179)AND Tim Ramey at: 612 707 5335 deliver free counseling services across the country,” says Danny Gardner, Freddie Mac’s vice president of affordable lending and access to credit. “Equipped with knowledge and some help with the down payment, many families today are finding that homeownership is now within reach.”