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Homebuyers blue on down payments

– The challenges facing prospective buyers of the nation’s least expensive homes are getting harder to overcome.

Already beset by stagnant wages, growing student debt and competition from investors who are snapping up listings, those looking to purchase moderately priced houses must also provide more cash up front. The median down payment for the cheapest 25 percent of properties sold in 2013 was $9,480 compared with $6,037 in 2007, the last year of the previous economic expansion, according to data from 25 of the largest metro areas compiled by brokerage firm Redfin.

The higher bar is a symptom of still-tight credit that is crowding out first-time buyers even as interest rates remain near historical lows. Younger adults, who would normally be making initial forays into real estate, are among those most affected, weakening the foundations of the housing market and limiting its contribution to economic growth.

“The numbers tell the story of why we have millions of potential homeowners who are renters or living with their parents,” said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School in Philadelphia. “What has changed is the ability to become an owner. And that’s changed through a down payment that’s more than doubled.”

The median down payment for the cheapest 25 percent of homes was 7.5 percent of the sales price last year, up from a low of 3.1 percent in 2006 and compared with an average 4.2 percent from 2001 through 2007, according to Seattle-based Redfin.

For properties in the middle 50 percent, the share rose to 8.8 percent in 2013 from an average 8.2 percent in the seven years leading to the last recession, and for the top quarter it climbed to 20.9 percent from 19 percent.

One of the main reasons for the jump is that fewer first-time buyers are applying for loans backed by the Federal Housing Administration, which require smaller down payments, after the government agency boosted mortgage-insurance premiums, said Malcolm Hollensteiner, the director of retail lending products and services for the U.S. unit of Canada’s Toronto-Dominion Bank. FHA raised the cost of borrowing and tightened underwriting to cope with losses on mortgages it backed as the property bubble burst.

Borrowers must now pay an upfront fee of 1.75 percent of the loan balance and up to 1.35 percentage points in annual mortgage-insurance premiums. A new program announced in May will help homebuyers who go through counseling lower their premiums.

Some of those borrowers might be going to private lenders that demand bigger down payments instead. In 2013, 39 percent of first-time buyers used FHA loans, which generally require 3.5 percent down, compared with 56 percent in 2010, according to data from the National Association of Realtors.

The affordability index for first-time buyers, which measures the ability of a family earning the median income to purchase a median-priced home at current interest rates, declined to 105.7 in the second quarter, the lowest since the final three months of 2008, according to the NAR.

Stricter lending, while crowding out market participants, also might mean a healthier crop of homeowners and reduced probability of another crash, said Gary Rogers, an agent with Re/Max Holdings Inc. in Waltham, Massachusetts, and a regional vice president for the NAR. Putting more money down probably means fewer owners will owe more than their properties are worth should prices drop.

“If there is a downturn, houses are still going to be more liquid than they were before when people were buying with zero and 3.5 percent down,” Rogers said. “The liquidity of housing is going to be improved as time goes on because of this trend, and I think that’s a really great buffer.”

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