More Homebuyers Making 20% Down Payments and Waiving Appraisal
Homebuyers who make a 20% down payment and waive appraisal and inspection contingencies are on the rise, based on the May 2021 REALTORS® Confidence Index (RCI) Survey which reports monthly transactions from a random sample of REALTORS®1.
Among all buyers2 who obtained a mortgage in May, the share of mortgages associated with at least a 20% down payment rose to 52% in May 2021, up from around 40% in 2011. Among first-time buyers, nearly one in three made a down payment of at least 20%, up from around 25% in 2011. This trend reflects the decline in the share of buyers who obtain mortgages insured by the Federal Housing Administration (FHA) and the Veterans Administration (VA) which insure zero and low downpayment loans.
Buyers With Conventional Financing Edge Out Potential Buyers Obtaining FHA and VA Loans
According to information provided by REALTORS®, conventional conforming mortgages (mortgages that conform to guidelines set by Fannie Mae and Freddie Mac), accounted for 74% of mortgages obtained by homebuyers in May 2021, an increase from about 65% during 2018 through 2019. Meanwhile, the share of FHA-insured mortgages to total mortgages in fell to 14% in May 2021 from about 20% in past years. The share of VA-guaranteed loans has also decreased to 7% in May 2021 from about 10% in past years.
Highly Competitive Market Is Resulting in Appraisal and Inspection Waivers on Contract Contingencies
According to REALTORS®, sellers are wary of the appraisal and inspection process. REALTORS® have reported that buyers who make an offer using FHA or VA financing find it hard to compete against other buyers who are offering cash or using conventional financing.
“It is extremely difficult for FHA/VA buyers to get accepted in a multiple offer situation. They are on the bottom of the hierarchy”
“Buyers using VA Loans are being discriminated due to ‘known low appraisals with VA loans’ which is not right at all.”
“VA Loans are at a complete disadvantage — sellers need to be offered an incentive to give more consideration to a VA Loan offer. There are a lot of misconceptions regarding VA appraisals and VA loans.”
Appraisals present a hurdle for homebuyers with VA and FHA financing at a time when prices are rising fast and homes are selling swiftly with little inventory on the market. In May 2021, the total inventory of homes (unsold) on the market was equivalent to 2.5 months of the monthly sales pace, well below the ideal level of 6 months. Appraisals, which are based on comparable sales and/or automated valuation, will always lag behind the “real-time” price based on current demand-supply fundamentals. In May 2021, the median existing-home sales price rose at a record high of 24% year-over-year, the highest annual pace since 19693. VA appraisals take anywhere from 5 to 15 days4, but properties are typically on the market for 17 days.
Homebuyers are waiving appraisals in order to close the transaction quickly. REALTORS® reported that among contract contingencies waived by the buyers, the most common contingency that buyers waived was the appraisal contingency (28%) followed by the inspection contingency (25%).
