Even in a frozen housing market, some are living out the American dream by purchasing a home, getting a mortgage, and putting just 3.5% down.
The only type of mortgage loan that has even ticked up in the past two years are Federal Housing Administration (FHA) loans, according to data released today by consumer credit reporting agency TransUnion. Home mortgages backed by the FHA rose 9% year-over-year in the fourth quarter of 2023, and it was the only loan type to register an increase in 24 months.
FHA loans are geared toward first-time or low- to middle-income buyers and allow for lower down payments of 3.5% for those with credit scores of 580 or higher. Homebuyers with credit scores around 500 could still qualify for a loan if they can put down 10% of the home value. However, the drawbacks are that mortgage insurance is often required until a buyer can reach 20% equity, and that usually means the cost of a loan is relatively higher with the lower down payment than a 20% initial payment.
The rise in FHA loans comes at a time when mortgage origination overall has plummeted. TransUnion’s analysis found that growth has declined for the past nine quarters and the number of loans stood at 900,000, below pre-pandemic levels that were well over 1 million per quarter. However, the year-over-year drop in the last quarter of 2023 was the smallest in two years, at 11%. In contrast, the decline was 64.5% in the fourth quarter of 2022.
Satyan Merchant, senior vice president of automotive and mortgage at TransUnion, said the FHA programs are a boost for first-time buyers or those who can only afford a lower down payment in a pricy housing market. When housing inventory is low and prices are elevated, consumers often choose to wait.
But sometimes, people just need to buy a house.
“That’s why we’re still seeing nearly a million [mortgage originations] a quarter and not zero,” said Merchant. “It speaks to the consumer deciding they may have to bite the bullet and find the best rate that they can.”
While the company’s data didn’t delve into the generational cohort seeking out FHA-backed loans, Merchant said generally first-time buyers tend to be younger—Millennials or Gen Zers—who are interested in forming households and having children. “We’re certainly seeing that the Gen Z population is active in the credit markets,” he said.
Still, the lower down payments are eerily reminiscent of the mortgages that were popular in the years leading to the Financial Crisis in 2008. A 2021 study, “The Lowdown on Low-Down-Payment Mortgages: Is It Safe,” found that lower initial down payment mortgages are more likely to be delinquent by 90 days or more than mortgages with 20% down payments.
Merchant, however, isn’t worried about a reemergence of the Great Financial Crisis some 16 years on. Underwriting standards were “dramatically different” pre-2008, he said. Now, high debt-to-income borrowers or those with little-to-no documentation about income and assets, aren’t able to write checks for relatively lower down payments and obtain a loan, he said.
“For any of us who have been in the industry long enough, it’s hard not to think of 2008 but the conditions were quite different then than they are today.”
