End of the 20 percent down payment?
At least in the luxury-home and jumbo-mortgage markets, lenders are accepting less money down for home purchases.
By MSN Real Estate partner Fri 9:23 AM
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Wealthy borrowers no longer need large down payments to get a mortgage.
More lenders are approving borrowers who put less than 20 percent down for million-dollar home purchases, suggesting banks are feeling sanguine about the luxury market.
Last month, Bank of America lowered its minimum down-payment requirement to 15 percent, down from 20 percent, for loans of up to $1 million. Wells Fargo cut down-payment requirements by the same amount to a minimum of 15 percent in July for private jumbo mortgages, which start above $417,000 in most parts of the country and exceed $625,500 in pricier housing markets, such as New York and San Francisco. Also, in March, New Penn Financial, a mortgage lender based in Plymouth Meeting, Pa., and subsidiary of Shellpoint Partners, began allowing 15 percent down payments for private jumbos.
Some banks haven't announced changes for private jumbo-loan down payments but will consider them. PNC Bank, for instance, says it weighs accepting down payments below the 20 percent threshold on a case-by-case basis.
Since the housing downturn, most lenders have required at least 20 percent down for private jumbo mortgages. A large down payment, according to lenders, made it less likely that borrowers would walk away from their home if prices plummeted and left them underwater on their mortgage. Mortgage applicants who wanted to make a down payment of less than 20 percent of the purchase price were often denied a loan. In some cases, their only option for approval was to pay mortgage insurance for at least the first few years of the loan.
Now lenders are lowering the bar, mostly for jumbo-mortgage approval.
"You're finally starting to see some loosening of terms on the jumbo side," says Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association.
Credit unions have joined the trend. In August, North Carolina's State Employees' Credit Union, whose members are current and retired state employees and their families, lowered down-payment requirements from 20 percent to 10 percent while increasing the maximum size of mortgages it will give out to $2 million per couple, up from $1.5 million. Beyond North Carolina, the credit union originates mortgages for homes in Georgia, Tennessee, South Carolina and Virginia.
To be sure, some lenders have allowed small or no down payments for wealthy home buyers for a while. Divisions of large banks that cater to the wealthy, such as BNY Mellon Wealth Management and Citi Private Bank, provide 100 percent financing to clients while requiring a portion of their investment portfolio as collateral in lieu of a cash down payment.
In contrast, the latest incentives from large banks don't require borrowers to have large sums of cash with that financial institution. And experts say it is likely that more banks will lower down payment requirements over the next year.
Most lenders, for their part, say they are loosening this requirement because a significant risk has subsided: Rising home values suggest that fewer borrowers will foreclose or walk away from their homes since they are appreciating assets. Lenders foreclosed on roughly 3,000 homes valued at $1 million and over during the first eight months of the year, down 21.1 percent from the same period a year prior, according to Lender Processing Services, a mortgage-data tracking firm.
Competition among lenders is also more intense as higher interest rates make it harder to attract mortgage applicants. Since May, applications for refinancing have dropped roughly 58 percent, according to the Mortgage Bankers Association, and lenders have sought to lure more homebuyers by requiring less cash down.
Jumbo borrowers stand to benefit in several ways. They can compare more than just rates when they shop around for a mortgage. And they can get the keys to their home without locking as much cash into it: On a $2 million home, borrowers would need to put down $400,000 with a lender who requires 20 percent down. That would drop to $300,000 with a 15 percent down payment, and the borrower would be able to put the $100,000 saved to work elsewhere.
In many cases, there are also fewer costs. Borrowers often have to pay a fee called mortgage insurance when they make a down payment that is below 20 percent, but most lenders who lowered cash-down requirements on jumbos have waived those costs.
Here are a few more points to consider:
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