House Down Payments Are Cheaper Than Ever, But You Pay the Price In Other Ways

People have been arguing about the correct amount to put in as a down payment on a house for decades.

While 20% has long been the conventional number financial advisers recommend for healthy interest payments, rising home prices push many to put in significantly less to lock in that home and start gaining equity as soon as possible. In 2022, the average down payment put down by Americans was just 6%.

DON'T MISS: How Much is a Down Payment on a House?

Amid a nationwide housing shortage, two major lenders have started to draw in homebuyers with the offer of lower-than-ever down payments. In the last month, UWM Holdings'  (UWMC) - Get Free Report United Wholesale Mortgage and Rocket Companies'  (RKT) - Get Free Report Rocket Mortgage both announced that they have started offering some customers a mortgage with them putting down only 1% of the total home price.

Here's How Some People Get a 1% Down Payment

"With ONE+, a homebuyer is only required to make a down payment of 1% of the purchase price and Rocket Mortgage will cover the remaining 2% needed to reach the required threshold for conventional loans," Rocket Mortgage said in a statement. 

Rocket Mortgage is one of the largest mortgage lenders in the country; in 2021, one in every 14 mortgages in the U.S. was signed through the Detroit-based company.

UWM similarly provides an additional 2% and both programs quickly attracted the attention of struggling homebuyers. The biggest perk is their ability to reach those who otherwise do not have enough saved for a down payment. To qualify for Rocket's programs, applicants need to earn less than 80% of their area's median income

"It's a really good way to expand homeownership for families that otherwise may not be able to get a hold of the American dream," David Stevens, who heads mortgage consulting company Mountain Lake Consulting, told Realtor.com. "One unfortunate reality for homeownership is saving up for a down payment can be pretty tough."

One recent Bankrate survey found that 40% of people struggling to buy a home named saving for a down payment and closing costs as their biggest hurdle.

Here's What You Risk With Such a Low Down Payment

But the lower the down payment, the higher the monthly payments and path toward full ownership. As the lender takes on more risk, borrowers will usually get a higher interest rate. As the final number depends on one's personal financial circumstances, Rocket and UWM cannot offer statistics on what that would be for someone using the program.

The biggest problem of programs with such low down payments is, however, the fact that they strap people who were already struggling to save with large payments.

While this could be the difference between giving that money away for rent or gaining equity for some people, a looming recession or an unexpected shift in circumstances could leave them struggling to pay them. Selling might also not be a solution since many markets in the US are now just starting to break a yearslong pattern of non-stop appreciation and those without enough down may find their mortgages underwater.

"Making it easier for everybody to get a mortgage with only 1% is like putting candy in front of a baby," Shmuel Shayowitz, a mortgage lender and president of River Edge, New Jersey-based Approved Funding, told Realtor.com. "People who should not be buying homes will be encouraged and enabled to buy homes."