A leery low-down on low down payments

It hurts to give up hard-earned money. As human worker bees, we instinctively repel the call to hand over our honey or, at best, minimize the amount “harvested.” So the appeal of a putting down just three percent – or less – of the price of a home to move in is well within our wiring.

The reason a first-time homebuyer should be somewhat wary of being wooed by a invitation to fork over a smaller up-front? A bigger (more burdensome) borrow.

Lenders nationwide, with the backing of Fannie Mae and Freddie Mac, are welcoming borrowers into programs in exchange for precious little initial cash. The phenomenon has risen largely from the jump in first-time homebuyers, who represented 15 percent of all single-family home loans in 2015 compared with 9 percent in 2009. Those mortgage rookies are often early-30-something millennials looking to balance home ownership with the financial demands of student loan payoffs and family upstarts. 

Putting down just three percent, and in some cases only one percent, certainly helps fresh-faced homeowners keep more immediate cash on hand for those other obligations. But this benefit is somewhat offset by the relatively sharp climb in home prices… Oh, and that pesky little activity known as cash flow, which is going to play out every month subsequent to signing those closing documents. 

Financial planners have long advised against borrowing in excess of 28 percent of gross monthly income for housing costs (mortgage payments plus taxes and insurance), or 36 percent for total debt (including credit cards and student loans). Add to that the recommended 10 percent savings for retirement and three-to-six months emergency reserve, as well as the need to maintain adequate life and disability insurance, and that higher monthly mortgage payment just put a dangerous squeeze on one’s take-home.

The good news is that, in the wake of the most recent housing bubble breach, lenders are taking caution to offer these low down payment fixed-rate programs to borrowers able to demonstrate dependable income and strong credit. In stark contrast to the willy-nilly distribution of faulty loan products a decade ago, these new non-adjustable options are available to those who can truly afford them. The question is, does that mean they should accept them?

Rationally speaking, the tiny down payment is putting off the inevitable. And that inevitable will, unfortunately, creep up in tandem with a first-time homebuyer’s higher utility bills, furnishing expenses and, perhaps, the cost of bringing up baby.