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MortgageReal Estate

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Most young buyers aren’t waiting to save for a 20% down payment

The share of first-time homebuyers using conventional mortgages that require private mortgage insurance, or PMI, to compensate for low down payments increased in the second quarter while the use of FHA loans fell.

Fannie Mae and Freddie Mac typically require buyers to purchase PMI if they’re using down payments smaller than 20% of a home’s value. While PMI allows buyers to get into a property earlier than if they waited to save for a larger down payment, it can add hundreds of dollars to a monthly mortgage bill. FHA loans also charge a monthly insurance premium which can be lower than PMI, depending on a borrower’s credit score.

The share of first timers using conventional mortgages with low down payments requiring PMI rose 6% from a year earlier, while the share using FHA mortgages fell 5%, according to a report from Genworth, one of the nation’s largest providers of PMI.

Overall, purchases of single-family homes by first-time buyers dropped 4% to 559,000 in the second quarter, the report said. The total share of first timers using some form of low down payment mortgages was about 80%, Genworth said.

Young buyers are finding it hard to save enough money to make a 20% down payment because home prices are rising so quickly, said Tian Liu, Genworth’s chief economist. The median price for a starter home was $237,700 in the second quarter, according to the National Association of Realtors. That’s up from $200,200 in 2016.

“Low down payment mortgages remain at the core of mortgage financing for first-time homebuyers, and we’re continuing to watch the shift away from government loan programs toward conventional loans with low down payments,” said Liu.

The market share for FHA mortgages has been shrinking as private mortgage insurers capture more business. In the first two quarters of 2019, 29% of the total insured market was FHA loans, down from 34% two years ago, while the share for loans using PMI increased to 47% from 39%, according to data from the U.S. Mortgage Insurers, a trade group.

PMI typically costs between 0.5% to as much as 2% of the loan amount on an annual basis. Borrowers might pay $1,000 a year – or $83.33 per month – on a $100,000 loan, assuming a 1% PMI fee.

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