Housing down payments can pose a challenge to a variety of Americans – from recent college graduates, who each owe an average of $35,000 in student loan debt, to current homeowners who are underwater in their current mortgages.
A new product called down payment insurance, though, could ease mortgage fears and change the housing landscape for the better.
Overall, consumers' fears are justified. More than 7.9 million homeowners today have negative equity, meaning they would lose all or part of their down payment should they sell their home. This figure is down from a high of 15 million in 2012, yet still represents a significant chunk of potential homeowners hesitant to buy in the near future.
Yet an illness, job loss or divorce could force a homeowner to sell their house for less than its original purchase price — and that's where something called "+Plus by ValueInsured" comes into play.
For an upfront premium that, in certain circumstances, could be rolled into the mortgage's interest rate, the down payment — all the way up to $200,000 — would be insured, with the homeowner as the beneficiary.
This down payment protection covers up to 20% of a home's purchase price or the actual equity lost, whichever is lower. The insurance kicks in if a borrower has to sell the house within two to seven years of purchase and cannot recoup the full down payment due to a market-driven decline in housing values. This is especially attractive for today's new generation of homeowners.
"The millennial mindset has created today's modern homebuyer," says Cleve Bellar, chief marketing officer at ValueInsured. "They have created a new set of home-buying expectations. They demand clear and simple services, terms that are fair and tools that give them control over their buying options. The millennial mindset is not defined by age or demographics. It's a group with common sense, savvy, the desire to control their own destiny and, ultimately, the need to protect their hard-earned savings."
Here's how it works, according to ValueInsured: Unlike similar coverage like private mortgage insurance, which protects the bank, +Plus protects the homebuyer. If the market falls and the homeowner decides to sell, +Plus will reimburse them up to the full value of their down payment. The premiums are expected to average around $1,200 for a 10 percent down payment on a $200,000 house, or $20,000. If you purchase the coverage as part of a lender credit toward closing expenses rather than paying cash for the coverage at closing, the +Plus premium could be rolled into the interest rate on the entire loan, slightly raising the rate.
Amalgamated Bank in New York, with $3.8 billion in assets, is one of the first financial institutions to offer this product, and ValueInsured is actively seeking credit unions interested in signing up.
"When the down payment is protected, the modern American homebuyer experiences more control, confidence and flexibility, even in a volatile real estate market," said Joseph Melendez, founder and CEO of ValueInsured in a press release. "Our down payment protection program is backed by one of the world's largest re-insurance companies, with over $8 billion in capital. So consumers can count on us to be there if and when they need to get their money back when they sell their home."
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