Curve

Millennial first-time homebuyers would need 20 years to save 20 percent down

Peter Warden
The Mortgage Reports editor

Millennial first-time buyers: 20 percent = 20 years?!

Millennial first-time homebuyers face a long slog if they try to come up with the “standard” 20 percent down payment for a home. A December 2018 study from Apartment List reckons that it would take two decades for the average renter to save that much.

But luckily, they don’t need 20 percent. Or even 5 percent.

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Advantages of 20 percent down

Yes, it’s true there are advantages to putting down 20 percent. You may get a better interest rate. And you don’t have to pay for mortgage insurance.

But be serious. Who’s going to wait 20 years to achieve their dream, just to avoid monthly insurance premiums? It’s not as if you can’t dump those ( and get a new rate) when you move or refinance — providing by then you have 20 percent to put down. This is a classic case of the perfect being the enemy of the good.

Related: Avoiding PMI is costing you $13,000 a year

20 percent down payment “all but dead”

So it’s no surprise that, in 2017, The Los Angeles Times reported the following statistics from the National Association of Realtors: “More than 70 percent of non cash, first-time home buyers — and 54 percent of all buyers — made down payments of less than 20 percent over at least the last five years.”

They reiterated: The 20 percent mortgage down payment is all but dead.

Zero down

You probably think this next bit is going to be all about VA loans. And some of it is.

But it’s also about VA loans’ little (and much less famous) brother, USDA loans. These, too, are available with no down payment. And you may qualify even if the closest you’ve ever gotten to a uniform was accepting a package from your postal carrier.

USDA loans

These are provided under the USDA Rural Development Guaranteed Housing Loan program, operated by the U.S. Department of Agriculture (USDA). But don’t be fooled by that reference to “rural.” Many suburban homes are eligible.

In fact, 97 percent of the entire landmass of the United States is eligible (housing about half of the US population). And you can check whether the place you want to buy is within a designated area using a tool on the USDA website.

These mortgages aren’t available to everyone. In fact, they are mainly for those with moderate-to-low or even very low income.

But if you’re eligible, you may be pleased with the low rate and mortgage insurance premiums you’re offered.
Related: USDA loans – rates and requirements

VA loans

These are backed by the U.S. Department of Veterans Affairs. And they’re intended to help servicemembers, veterans, and their eligible surviving spouses to be homeowners. If you’re unsure whether you can apply, you can check the VA website’s eligibility guide.

As you’d expect for the nation’s heroes, VA loans are arguably the best mortgages available. They come with:

  • Zero down payment
  • Low rates
  • No mortgage insurance
  • Low closing costs
  • Easy qualifying criteria for the eligible — including credit standards

In addition, special housing grants may be available for those with service-related disabilities.
Verify your new rate (Sep 19th, 2019)

20 percent down? How about 3 percent or 3.5 percent?

Many first-time buyers haven’t served and don’t live in USDA-eligible areas. They’ll likely need a down payment.

But that doesn’t have to be close to 20 percent. How does 3.0 percent or 3.5 percent sound? And even that money can often be gifted or borrowed from an acceptable source.

Fannie and Freddie and 3.0 percent down

Fannie Mae and Freddie Mac both offer 3 percent down mortgage products. Fannie’s is called HomeReady, while Freddie’s is Home Possible Advantage.

These have both been carefully engineered to make home buying easier. For example, Fannie Mae lets applicants count the income of everyone in the household (even boarders) on their applications.

Freddie Mac allows buyers who make their own home improvements to count their “sweat equity” (the value of their do-it-yourself efforts) toward their down payment and closing costs.

And mortgage insurance is discounted. However, you do need a decent credit score to get approved.

FHA loans and 3.5 percent down

Credit scores are less critical for those wanting a mortgage backed by the Federal Housing Administration. Of course, you can’t be a total deadbeat. So your score must be at least 580 to get approval for a loan with 3.5 percent down.

And low credit scores cannot be caused by recent derogatory credit — you have to show that you can manage your finances successfully.

Or, if you have a 10 percent down payment, you might get a loan when your score’s as low as 500. Again, though, the reason for your low score can’t be that you’ve left a trail of burned creditors in your wake recently.

Requirements for your debt-to-income ratio (DTI) can also be more flexible than with other mortgages. Your DTI is the proportion of your monthly income that goes on payments on all your debts (but not daily living expenses like utilities).

However, you may balk at the FHA mortgage insurance requirements. You’ll pay both an upfront premium (1.75 percent, which can be wrapped into your loan) and an annual one that’s collected monthly. And the monthly payment remains for the life of the loan, no matter how low your balance is.

Down payment assistance programs (DPA)

Like USDA loans, these are much less famous than they should be. Many, many people have no idea they exist.

But there are more than 2,000 DPAs across the country. And the sole reason for their existence is to help (mostly first-time) homebuyers achieve their down payment goals. Some even offer free money — grants that you don’t have to repay.

A range of help

Even if your local down payment assistance program (DPA) doesn’t provide actual grants, it may well offer money in other forms:

  • Deferred-payment loans — You pay these back only when you move, sell or refinance
  • Forgivable loans — These may be forgiven in chunks as the years go by. You’ll only have to repay the remaining balance if you move, sell or refinance early
  • Installment loans — You pay these down monthly as you’re paying down your actual mortgage. Such loans often have low– or even zero — interest rates

Will you qualify? And, if so, for what sort of help?

That’s a zip-code lottery, with support varying from area to area and state to state. But you’d be crazy not to find out what’s available to you.
Related: Complete guide to down payment assistance in the USA

Scaling the down payment mountain

That Apartment List survey found that 62 percent of respondents identified down payments as the major obstacle to their buying their first home. But many of them probably believe that they need a minimum of 20 percent down.

That’s tragic. How many of us have the stamina and commitment to save for a dream that appears to be 20-years distant? And how fed up would we be if we found that it was achievable in, perhaps, three years? Or in a matter of months with the help of a DPA, VA or USDA loan?

If you know people who are saving to be homeowners, do them a favor and make sure they understand all their options.

Verify your new rate (Sep 19th, 2019)