Low-Down Mortgages Picking Up—to Chagrin of Some

Many low-down-payment borrowers—including first-time home buyers—are returning to the market, boosting housing but raising concern among skeptics who worry about the risk of such mortgages.

Such borrowers had largely shied away from the market during the past two spring home-buying seasons, discouraged by weak wage growth and higher fees for loans with small down payments.

Now, lower unemployment and early signs of wage growth are boosting consumers’ finances. At the same time, a sharp fee reduction on loans backed by the Federal Housing Administration has cut the cost of a low-down-payment mortgage, stimulating demand.

Low-down-payment mortgages are “becoming part of the water-cooler discussion again,” said Lawrence Yun, chief economist for the National Association of Realtors. “People are hearing that maybe credit is less tight now than before. They’re sensing that the housing market is open to them again.”

Subprime loans—those to borrowers with especially low credit scores—dried up after the recession and are still largely absent from the market. On the other hand, the availability low-down-payment loans to more-creditworthy borrowers, backed by the FHA and U.S. Department of Veterans Affairs, never went away.

Instead, the high costs of such loans, along with low confidence among the consumers who use them, diminished their role in the market.

The return of first-time buyers could help drive prices higher and boost new-home sales. Those trends in turn may spur economic growth.

But there is concern among some who see such mortgages as a hallmark of the housing bubble and fear that a return to easier lending standards could set off a new crash. Many critics also say the government’s role in encouraging homeownership is misplaced and puts taxpayers at risk.

The perception of an easier borrowing environment is pulling in more first-time home buyers, a cohort that until recently has represented a smaller-than-usual share of purchasers. They accounted for 39.5% of purchases in April, up from 35% a year ago, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey of about 2,000 real-estate agents. That was the highest percentage since 42.8% in June 2010, when first-time buyers rushed into the market to take advantage of an expiring tax credit

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