According to multiple surveys by the National Association of Realtors (NAR), many would-be homebuyers are opting not to explore their options in the housing market because they believe that they cannot afford the down payment associated with buying a home. While this view is largely inaccurate, the prevailing notion that a home purchase necessitates a 20 percent down payment has held many back from seriously considering a home purchase, the NAR reported in its 2017 Aspiring Home Buyers Profile report in February 2017.
In reality, at that time the average down payment on a purchase mortgage was about 11 percent, and that number was usually lower for young adults and first-time homebuyers. For that population, the average down payment was just under eight percent in 2016. Today, it likely could be even lower as more industry players realize just how big a handicap this misconception truly has been for homebuyers.
2018 Will Bring More Creativity to Down Payments
Since the housing crash, a number of rent-to-own companies have emerged offering mortgage products that apply a portion of rent payments and even, in some cases, a percentage of a home’s appreciation toward a tenant’s eventual down payment. Realtor.com recently observed in the right markets, tactics like this could “reduce the down payment requirement to almost nothing.” Tenants must show a history of on-time payments with the company and not have owned another home in the past three years.
Developers are also getting on board with these types of programs. Lennar Corp. is offering a pilot program in which participants can apply to have a “significant chunk” of their student loan debt paid off if they purchase a home from that developer. Another program offers $50,000 to borrowers who commit to offering a room of their home for rent on Airbnb.
Important New Trends
It is important for real estate investors to understand what sets these new mortgage products apart from other down-payment assistance programs. One of the biggest differences is that the eventual buyer is already living in the property that they will be buying. Unlike down payment assistance programs that are based on income or economic circumstance, these programs are based largely on current tenants’ ability and dedication to demonstrating that they are willing and able to take certain steps to obtain financing and then maintain it.
As Bill Young, co-founder of Home Partners America, one such rent-to-own company, puts it, “Their skin in the game is they’ve proven they can pay their rent on time for 24 months.” Fannie Mae will back some of these loans, depending on how the buyers qualify and with whom the developers and landlords are working to structure the financing.