3% down payments lure first-time homebuyers

DES MOINES, Iowa — After years of moving around the country for his job with Marriott hotels, John Eddleman wanted to put down roots.

Last month, he bought a brick bungalow on Des Moines' south side, taking advantage of a recent federal policy change that allows down payments of as low as 3%.

"It came at just the right time because otherwise I would have had to scrape a lot more money together," Eddleman, 49, said. "At 3% down, you can't pass that up."

A collection of new policies — including lower down payment requirements, decreased mortgage insurance premiums and looser lending standards — are intended to make it easier for first-time buyers like Eddleman to get a loan.

Some say the changes won't remove the underlying hurdles for first-time buyers, like slow wage growth and student loan debt. And some lawmakers have criticized the policies as a step toward the risky lending practices that led to the 2007 housing crash. But lenders and real estate officials say they expect the changes to bring a wave of new homebuyers in 2015.

"It's being predicted in Iowa and across the country: This is going to be a year when we see a lot of Millennials and first-time homebuyers get into the market," said Brennan Buckley, general manager of Iowa Realty.

EASING THE ROAD TO HOMEOWNERSHIP

Recent policy changes aim to improve access to home loans in several ways:

• In December, mortgage giants Fannie Mae and Freddie Mac announced they would reduce the minimum down payment on certain mortgages from 5% to 3%. For someone buying a $150,000 home, the change means the difference between a down payment of $7,500 and $4,500.

• In January, the Federal Housing Administration announced it was reducing mortgage insurance premiums by 50 basis points. The White House said the reduction would save the average homebuyer about $900 a year and would enable about 250,000 people to buy a home.

• Lenders have been lowering some of the requirements on borrowers in response to federal regulators clarifying mortgage lending rules created in the wake of the 2007 housing crash.

Brad Blackwell, executive vice president with Wells Fargo Home Mortgage, said he expects first-time home sales to grow less than 10% in 2015, but he said it would still be a "meaningful" increase.

Wells Fargo, the largest mortgage lender in the country, is offering two types of 3%-down mortgages. It's still a bit early to gauge demand, "but we've seen a lot of excitement about them," Blackwell said.

In the past year, Wells Fargo has rolled back several borrower requirements. The company increased the amount of "gift money," like cash from a homebuyer's parents, that a borrower can use toward a down payment on some loans. It also reduced the minimum credit scores for certain loans.

To qualify for a 3%-down mortgage from Wells Fargo, borrowers need a credit score of at least 620. But without a good job and a solid explanation for credit blemishes, buyers will probably need a score of 660 to 680, Blackwell said. The minimum score for FHA mortgages is 600.

MILLENNIALS ENTER THE MARKETPLACE

Easier access to credit will be one factor in getting first-time homebuyers into the market. A bigger factor may be that Millennials are finally starting to settle down, Blackwell said.

"We're starting to see them become homebuyers," he said. "Forget the financial end. The pure demographics are going increase the number of first-time homebuyers in the market."

Frank Nothaft, chief economist at the real estate research firm Corelogic and the former chief economist for Freddie Mac, said lower down payments and mortgage insurance premiums come at the right time. Interest rates remain low, and the spring buying season is around the corner. But they're not a cure-all.

"It doesn't mean everyone who is renting right now will suddenly qualify for a mortgage," he said. "There are still plenty of challenges in the marketplace. Many younger households are still struggling to find good paying jobs and may not have the income or savings to qualify for a mortgage."

Millennials have been slow to jump into homeownership. The generation of 18- to 34-year-olds came of age in the recession and they're starting to buy homes in their early 30s, not their mid- to late-20s like previous generations, Blackwell said.

This year, Millennials are poised to overtake Baby Boomers as the nation's largest generation, so getting them to trade rent checks for mortgages is seen as critical to strengthening the housing market.

First-time homebuyers accounted for only 33% of home sales in 2014, the smallest share since 1987, according to a report from the National Association of Realtors.

Historically, first-time buyers have accounted for more than 40% of sales and have played a key role in the market, allowing established homeowners to trade up for pricier houses.

"There is an upward domino effect," said Buckley, the Iowa Realty executive. "When they enter the market, it can kick off two or three home sales right up the line."

OPTIMISM FOR 2015

Iowa real estate agents are entering the spring buying season with sense of optimism. Des Moines area home sales in January were up 13%.

"I think by the middle of March, we're going to be so busy we're not going to be able to breathe," said Monica Janelle, an Ankeny-based agent who is currently working with three 20-something clients looking for their first homes.

Laura Quint, 25, of Huxley, is looking for a two-bedroom townhouse in Ankeny with a garage and an open kitchen. She has been pre-approved for a 3%-down conventional mortgage and a 3.% down FHA mortgage.

"It definitely makes me want to buy now rather than keep renting," she said. "It's some incentive to start putting equity into a place."

Eddleman ended up putting down about $2,400 on his house. He plans to refinish the floors, renovate the kitchen and turn a bedroom into his art studio. The smell of paint still hung in the living room last week after he finished covering the pea-soup-green walls with a more muted color.

"It was a great deal for me," he said of the 3%-down loan. "The money I would have spent on the down payment I'm going to be able to spend on the house."

Aschbrenner also reports for The Des Moines Register