Buyers increasing down payments to gain edge

Buyers are facing heavy competition in certain U.S. housing markets, and many are increasing their down payment to gain the competitive edge.

In purchase situations with multiple offers, the buyer with the larger down payment is likely to win out. In part, that’s because larger down payments suggest less risk that financing could fall through. More importantly, a higher down payment can effectively bridge any financing gaps should the home appraisal come in at less than the offered purchase price.

The median down payment for homes purchased with financing in the third quarter of 2017 rose to a high of $20,000, or 7.6 percent of the median sales price of $263,000 for that period, according to research from Attom Data Solutions, the curator of the biggest multi-sourced property database in the country. That’s a 6.1 percent increase over the same time period in 2016.

Down payments are even higher on luxury homes, with a median down payment of $385,500 on a financed home-purchase over $1 million, or 28.2 percent of the median sales price.

Be aware that if you’re applying for a jumbo loan with a low down payment, you may have to pay a higher interest rate. Meanwhile, you can help alleviate some lender concerns by coming to the table with easily “sourced” and/or “seasoned” funds. Sourced funds can be readily traced back to their origin (e.g., a stock sale or 401k withdrawal), while seasoned funds have been in your bank account for at least 60 to 90 days.

Lenders prefer sourced and seasoned funds because they help ensure that you aren’t borrowing money from family or setting up some type of hidden, last-minute loan to meet your down payment requirements.  Essentially, lenders favor borrowers who have a demonstrated commitment to saving and the financial wherewithal to cover the down payment, not just the monthly payments.

Finally, recognize that home loans will probably get more expensive this year. Lawrence Yun, chief economist at the National Association of Realtors, predicts that we will see at least three more short-term rate increases in 2018, with 30-year fixed-rate mortgage rates rising to 4.5 percent by the end of 2018.

Other experts suggest that the new tax cuts, coming at a time of full employment, will lead to inflation pressure, sending mortgage rates even higher.