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For many Americans, buying and moving into a first home stands as one of the most enjoyable milestones of adulthood. Yet, eating pizza by candlelight amid a pile of moving boxes is an experience that many young people are missing out on—despite historically low interest rates.
For many young borrowers, it’s more difficult to buy a first house than it was for their parents, even when the young home buyers have solid incomes and strong credit histories.
A 2014 National Association of Realtors (NAR) survey found that first-time buyers accounted for only 33 percent of home purchases—down five percentage points from 2013. Rising college debt levels, a difficult job market, and stricter mortgage lending rules all play a part in lower home ownership rates.
A recent study indicates that it takes an average 12.5 years to save up a 20 percent downpayment, which most lenders require to issue a mortgage.
So, a young couple—or a single person—who begins saving now likely won’t have saved enough for a downpayment before 2027, according to research by RealtyTrac that assumed an annual savings rate of 5.6 percent.
The median price for an existing home was $219,800 in August, according to NAR, and the median price for a new home was $275,600. That translates into a 20 percent downpayment of $43,960 to $55,120. Of course, housing costs—and downpayments—are even higher in markets like California, the New York Metro region and the D.C. area.
For qualified borrowers with strong credit scores, mortgage insurance provides alternatives while providing assurance to lenders. Here are some of the down payment options borrowers have by using mortgage insurance—or saving 20 percent to put down—in the case of a typical $275,600 new home:
►Five percent downpayment (with private mortgage insurance): $13,780
►Ten percent downpayment (with private mortgage insurance): $27,560
►Twenty percent downpayment (without mortgage insurance): $55,120
In addition, mortgage insurance offers additional freedom and flexibility for qualified borrowers, including:
►Lender-paid mortgage insurance (MI) can give the purchaser more buying power—for the same monthly payment.
►Borrowers with the ability to put some money down can achieve significant savings by paying for MI with a single up-front premium at closing. The upfront MI payment is sometimes paid by the seller, the builder or another party as part of the sale negotiations, and it can also be financed as part of the mortgage loan.
►A single upfront premium can give the borrower more buying power than with a government-backed mortgage insurance program such as FHA. With a five percent downpayment, a borrower can get as much as 20 percent more house with private mortgage insurance than with FHA.1
It’s also important to remember that private MI coverage can be cancelled when it’s no longer needed—and by law the servicer must cancel coverage when the mortgage reaches 78 percent LTV.
FHA’s coverage is not cancellable if the loan-to-value (LTV) ratio is greater than 90 percent (meaning the buyer’s downpayment is less than 10 percent). It is cancellable after 11 years if the LTV is less than or equal to 90 percent. Over the life of a 30-year mortgage, FHA insurance premiums can total as much as four times the cost of cancellable private mortgage insurance.
By enabling first-time homebuyers to take advantage of a low downpayment, lenders can help more young buyers and families to purchase now—before interest rates and home prices rise.
Acting now will allow first-timers to achieve the equity—and, potentially, the benefits of rising home values—that can be so important as these now-young buyers later age into their retirement years.
As senior vice president–insurance operations, Michael Hitt oversees underwriting, loss management, loss mitigation, investigations and appeals. His goals for the operations team are to make the right decision on every loan and maximize efficiency and productivity without sacrificing quality, which are the guiding principles of United Guaranty's risk management philosophy. A Clemson University graduate, Hitt joined United Guaranty in 1996. He was named vice president–insurance operations in 2012 and SVP in 2013.
1—Assumptions: 95 percent LTV United Guaranty, and 96.5 percent LTV FHA, single premium paid at closing, property located in a stable housing market, two borrowers with a representative credit score of 760, 30-year conventional loan. Interest rate of 4.625 percent for Performance Premium; 4.25 percent for FHA. Results in a payment of $3,990 at closing and $1,173 monthly payment conventional loan with United Guaranty and $3,378 at closing and $1,174 average monthly payment during first five years for FHA. Performance Premium pricing as of May 12, 2014. FHA rate source: FHA Mortgagee Letter 2013-4.
This article originally appeared in the December 2014 print edition of National Mortgage Professional Magazine.