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For Many Home Buyers, a 5% Down Payment Isn’t Enough

Small down payments aren’t going to cut it in this turbocharged housing market. If you want to buy a home, you’re likely going to need a big pile of cash.

6/20/2021 1:45:00 PM

Small down payments aren’t going to cut it in this turbocharged housing market. If you want to buy a home, you’re likely going to need a big pile of cash.

Half of existing-home buyers in April who used mortgages put at least 20% down. That is locking many first-time buyers and lower-income families out of homeownership.

are also complicating appraisals, which means some buyers are being forced to shell out more cash than they had expected.Appraisals are based partly on recent sale prices for comparable homes in the area. When housing prices rise quickly, appraisal values don’t always keep up. Mortgage lenders will typically lend only enough to cover the appraised value of a home, so when an appraisal comes in low, the buyer has to make up the difference or let the deal fall through.

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Oscar Reyes Santana and his family bid on at least five homes, each time offering at least $30,000 above the asking price, but they lost out every time.For example, a buyer who plans to put 20% down on a $500,000 purchase expects to pay $100,000. But if the home is appraised at $450,000, the cash payment goes up to $140,000—the sum of the $50,000 shortfall plus a $90,000 down payment.

Many buyers are still getting offers accepted without putting 20% down. First-time home buyers who used mortgages paid 9.1% down on average year-to-date through mid-May, though that is up from 8.4% for all of 2020, according to CoreLogic. Repeat buyers paid 16.6% down on average.

SHARE YOUR THOUGHTSHave you bought a home during the pandemic? Join the conversation below.Briana Stansbury, who works at a community college in Portland, Ore., recently made an offer on a two-bedroom house. She used a 5%-down loan program that Freddie Mac offers for first-time buyers, and she agreed to go through with the purchase even if the appraisal came in as much as $10,000 below her purchase price of $371,500.

That put Ms. Stansbury at risk of having to come up with extra cash in a hurry, but she had lost out on bids for other houses and thought it would give her a leg up.Ms. Stansbury lost sleep while she waited for the appraisal. But it came back above the sale price, and she closed on the house in May.

Danyell Allen of Cedar Park, Texas, felt ready to buy a house this year. She had saved up for a 5% down payment. Her children wanted to paint their walls and adopt a pet, which they can’t do in their rental house.But after losing out on more than 10 offers, she called off the search. “The lowest I heard I was beat out on any home was $30,000 over asking price,” she said. “That’s not something I can do.”

Prices are surging in part because there aren’t enough homes on the market to meet demand. Read more: The Wall Street Journal »

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