Avoid the down payment blues
Getting your foot in the door of homeownership isn’t easy.
It will require a chunk of money upfront for things like closing costs and new furniture. But your ability to afford the down payment may be your biggest challenge.
New research shows making the down payment is the greatest financial barrier to homeownership.
But the good news is you may not have to put down as much as you think. The trick is choosing the right loan or assistance program. So dig deeper for the facts. Find out what you can afford and qualify for. And consider creative strategies to help save for the down payment.
What the research found
A new survey by COUNTRY Financial has some fascinating findings:
- 40 percent of buyers and 46 percent of millennials say the greatest financial barrier to owning is their ability to afford the down payment. “Renting is more affordable” ranks as number two (18%).
- If given $25,000, more Gen Yers (26%) would prefer to devote this newfound cash toward a down payment for a new home or pay off a mortgage over paying off credit card or student debt.
- Nearly half of renters believe a mortgage payment would be less costly than paying rent. Yet 24 percent say they have no plans to buy a home in the next four years. The possible reason? Half of those polled believe it would take at least four years to afford the down payment.
- Contrary to popular belief, buying a home doesn’t always require a 20 percent down payment. Most buyers surveyed (54%) actually put down 10 percent or less; 36 percent put down five percent or less.
Why so many can’t afford the down payment
Doyle Williams is executive vice president and chief marketing officer for COUNTRY Financial. He says it’s understandable why so many buyers worry they can’t afford the down payment.
“A down payment can be a very intimidating expense for many first-time buyers,” says Williams.
Bruce Ailion, Realtor and real estate attorney, agrees.
“Many renters know that the cost to rent is higher than the cost to buy. These higher occupancy costs make it hard for non-owners to save up for the down payment. Plus, a number of people have steep student loan debt,” says Ailion. “And wages have been stagnant in many sectors. Hence, discretionary income and savings are squeezed. Factor in that health care, insurance, child care and other expenses are going up, too.”
Kathy Cummings is senior vice president of Homeownership Solutions and Affordable Housing Programs with Bank of America. She says buyers sometimes falsely assume that they won’t be able to afford the down payment. Unfortunately, they select themselves out of home ownership.
“The challenge is often around identifying how much down payment people really need,” she says. “But once they have the right figure in mind, they can then set a tangible goal to work toward.”
How much you actually need to save
It’s true that many conventional mortgage loans require at least 20 percent down. That’s the case if you want to avoid paying private mortgage insurance (PMI). But some lenders let you skip PMI and pay less than 20 percent if you have a high credit score.
Say your lender only requires 10 percent down without PMI needed. On a $200,000 home, that’s only $20,000. That’s much more affordable than $40,000 (20% down).
But if you qualify for the right loan programs, you can pay a lot less than 10 percent down. For example:
- An FHA loan can require as little as a 3.5 percent down payment.
- A Freddie Mac Home Possible mortgage requires as little as 3 percent down.
- A Veterans Administration (VA) loan requires as little as zero down.
- A United States Department of Agriculture (USDA) loan requires zero down.
Even if you don’t qualify for these four loans, you may be eligible for down payment assistance in your area. This can enable you to buy a home with little to no money down and no PMI required.
How to afford the down payment
To afford the down payment, try these tips:
- Set realistic spending and savings goals. “Create a budget that will help you stay on track,” says Williams. “Prioritize your financial goals. Then, create a plan to achieve them. Talking with a financial professional can help.”
- Take on extra work. Ask for more paid hours at the office or pursue a side project. “Tap into a side hustle mentality. This can open up new financial opportunities,” Williams suggests.
- Move in with a loved one. A new Bank of America report found that 32 percent of Gen Zers would move in with their parents or in-laws to save up for a home.
- Ask mom, dad or another relative for money aid. “Twenty-one percent of Gen Zers we polled said they’d ask for financial assistance from their parents in order to buy a home,” says Cummings.
- Explore a rent-to-own home. With this option, you lease a home for a set amount of time and have the choice to buy it before the lease ends. This may give you extra time to save for the down payment.
- Request help from your employer. Ask your boss for a raise or bonus.
- Part with some precious belongings. Sell valuables and rarities on eBay or Craigslist.
See how much you need to save for a down payment
The amount you need down depends on the loan program you qualify for.
Speak to an approved lender who can examine all the options for you and give you a precise down payment requirement as well as today’s rates.