How Down Payment Loans Affect the Housing Market

As financial standards for loans are getting tighter, potential homebuyers are losing out to all-cash offers or higher down payments from other buyers in an ultracompetitive housing market.

Many first time buyers depend on mortgage loans financed by the Federal Housing Administration, whereas sellers in a tight market are looking for home shoppers with the “highest down payment, a near perfect credit score, and the ability to outbid others,” according to Zonda Chief Economist Ali Wolf. 

“It’s just dismaying how difficult it is for first-time buyers to be able to snag that home,” says Gay Cororaton, senior economist at the National Association of Realtors®, a trade group.

Typically, a seller will look more favorably on buyers who have at least 20% to put down than on buyers who have less to offer on a down payment. Buyers ready with 20% of the purchase price stand a better chance of having their mortgages approved and for these deals to go through.

However, data shows that conventional loans are edging out government-backed loans in today’s market. In August 2019, 30% of mortgage loans were backed by the FHA, VA, or USDA, according to NAR data. By August 2021, the share of government-backed loans had dropped to just 23%.

A record 73% of all new mortgage debt in the first quarter of 2021 went to buyers with credit scores of 760 or above, according to data from the New York Federal Reserve. This puts a lot of pressure on first-time homebuyers with FHA loans, whose average credit score is 676, according to the Urban Institute.

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