How to Get Smart on Down Payments

How to Get Smart on Down Payments - @813RealEstate - Edrina Hammond, Realtor

Picking the right house is just one of the big decisions you’ll face when buying property. Deciding on the down payment is another.

Low inventory in some national markets continues to pressure potential buyers into making bigger down payments to gain a competitive edge. But the possibility of rate increases in the coming year and new rules on mortgage-interest deductions may also affect how much buyers put down.

“A lot of people are trying to come to grips with the new tax changes and how they’re going to affect mortgages,” says Jack McCabe, a housing-industry analyst in Deerfield Beach, Fla. “It will have more effect on the upper end of the market when it comes to down payments and possibly the sales pace as well.”

The median down payment for financed home-purchases in the third quarter of 2017 was a record $20,000, or 7.6% of the median sales price of $263,000, according to Irvine, Calif.-based housing-research firm Attom Data Solutions. That is up from 7.1% in the previous quarter and from 6.1% in the third quarter of 2016.

Down payments are even higher on purchases of luxury homes. In the third quarter of 2017, the median down payment on a financed home-purchase over $1 million was $385,500, or 28.2% of the median sales price.

“If you want to play in the high-end market, you have to be able to pony up a bigger down payment,” says Daren Blomquist, Attom senior vice president.

With the inventory of homes relatively low in many markets, buyers are doing whatever it takes to compete. “That means that in many purchase situations there are multiple offers, and the buyers who have the bigger down payment are more likely to win out,” Mr. Blomquist says.

What’s in store for 2018 remains unclear. The Fed raised interest rates last month—the third time in 2017—citing an improving economy and labor market.

Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors, a real-estate trade group, is forecasting at least three more short-term rate increases this year.

He expects 30-year fixed-rate mortgage rates to rise to 4.5% by the fourth quarter of 2018—and 4.8% by the end of 2019.

Also uncertain is how changes in tax policy will affect home buying, especially at the luxury end. Under the new rules, only the interest on mortgage debt up to $750,000 is deductible—down from the $1 million cap in current law.

For now, not all jumbo-mortgage lenders require large down payments. At BBMC Mortgage in Chicago, the lending division of Bridgeview Bank Group, qualified borrowers could put down as little as 5% on a jumbo mortgage up to $650,000, according to Todd Jones, the firm’s president.

For loans up to $1 million, programs are available that allow 10% down. For jumbos topping $2 million, “there’s a big jump where you need 30% down,” he says.

Other lenders, such as Quicken Loans in Detroit, are still requiring down payments of 15% to 20%. “Most clients put down more, not because they have to, but because they have the wherewithal to do it,” says Bill Banfield, Quicken’s executive vice president of capital markets.

Jumbo tips

Here are a few things to consider when determining the amount of your down payment.

• Jumbo limits changed. Conforming-loan limits on mortgages purchased by Fannie Mae and Freddie Mac have increased. For 2018, in most of the U.S., mortgages of up to $453,100 are eligible for purchase by Fannie and Freddie, up from $424,100 in 2017. In high-cost areas, such as San Francisco and New York City, the conforming loan limit is now $679,650, an increase from $636,150.

So, a loan that was a jumbo last year may now be conforming in 2018, a matter that may affect mortgage rates and terms.

• Long-term impact. If you’re applying for a jumbo with a low down payment, remember that it might come with a higher interest rate. Mr. Jones, of BBMC, says that a borrower might save three-eighths to a half of a percentage point on the interest rate by putting 30% down rather than 10%.

• Use seasoned funds. To avoid lender concerns about where your down payment came from, make sure your funds are “seasoned.” Seasoned funds are readily sourced and typically have been held in your bank account for at least 60 days. That avoids lender concerns about whether your down payment has been borrowed.