Banks are currently asking for higher down payments ever since the housing bubble burst. This causes home buyers to save longer and truly consider what type of house they can afford. Recently, the Obama administration reported that they’d call for a gradual raise in down payments, raising them to 10 percent on conventional loans. Private lenders are already ahead of the Obama administration, having already sharply raised their down payments to reduce their own risks.
Last year, the average down payment rose 22 percent in nine leading cities in the United States, double the figure it was three years ago. This is the highest average down payment since sources began tracking real estate payments in 1997.
Banks are encouraging higher down payments because it lowers the risk of delinquency. During the housing boom, many home buyers put down a very low down payment (or none at all). The Federal Reserve Bank of St. Louis found in a 2009 study that buyers who laid down lower down payments were more likely to default.
Higher down payments could mean that housing prices fall even further. Experts are saying that if the government decides to raise down payments to 20 percent in an effort to ease the chance of delinquencies, the housing market would crash.
There is hope for people who can’t afford such high down payments. Alternative lending programs run by programs like the Federal Housing Administration lend to higher-risk borrowers. These programs can offer a solution to people who can’t afford or who don’t qualify for conventional loans. Other people go to programs that sponsor loans for veterans, for example.
People who go to the Federal Housing Administration for their housing experience a 3.5 percent down payment. These FHA-backed mortgages made up nearly half of home purchases last year. However, these mortgages usually involve higher interest rates. In addition, they are also forced to pay for private mortgage insurance.