Potential Homeowners Faced With Larger Down Payments
|February 17, 2011||Posted by Sandie under News, Real Estate, Rent2Buy Concept|
Just three years ago, the median down payment for conventional mortgages in 9 major U.S. cities was at 11%. Last year, this number rose to 22%. The stiff increase in the amount of money banks require for a down payment will have a marked impact on the housing market and will undoubtedly change the behavior of those seeking homeownership.
An increase in the required down payment means some individuals who intended to purchase a home are no longer financially able to do so. This shrinks the portion of the population looking to buy a home, and thereby negatively impacts the housing market.
“There’s no question that the tightening of criteria unquestionably prices households out of the market,” says Zillow Stan Humphries, economist at Zillow.com. “The middle ground buyer is the one having to fight to get a conventional mortgage.”
The Obama administration has proposed that the minimum put down for a conventional loan be gradually increased to 10%. Private lenders are also becoming more risk averse, increasing the amount required for a down payment.
What effect will the increasing down payment requirements and the elevated cost of borrowing have on the future of the housing market?
One significant outcome will be the continuing decline of house prices. Another effect will be to push individuals seeking homeownership to consider less traditional means of financing.
The rent to buy or rent to own option will become a viable alternative for those individuals who are no longer able to afford the down payment banks and private lenders require. People with their hearts set on homeownership will most likely keep renting and trying to save up enough money to shell out for a down payment in the future. However, the act of paying rent and the intention of saving money are two conflicting financial situations.
Instead of just renting a property and trying to save money, those looking to achieve the “American Dream” of homeownership should consider renting a place with the option to buy it.
Read the full article in the Wall Street Journal.