Wooden model house on the background of U.S. dollar bills. Symbolic image of buying or renting a house. Selective focus, copy-space.
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To supplement a report on barriers to homeownership, housing finance researchers at the Urban Institute last year published a down payments quiz. They included six questions, such as: “What was the median down payment made in the U.S. for mortgages used to buy a home in 2017?” Another: “How many states have programs that can help home buyers secure an affordable down payment?”
If you don’t know the answers, you’re not alone. That may go a long way toward explaining why about 19 million young Americans who should qualify for a mortgage don’t have one.
From racial disparities in family wealth to stringent lending standards, researchers have identified myriad factors as keeping Millennials from becoming homeowners at the same rate that older generations did. Many of these factors are outside their control. Experts believe, however, that a lack of knowledge can be as detrimental to first-time homeownership rates as a lack of resources.
In a recent survey, 39% of renters said they believed they would need to put down more than 20% to secure a mortgage. In reality, the median down payment on a mortgage in 2017 was just 5%. (California, Colorado, Hawaii, Massachusetts, New Jersey, New York, Oregon and Vermont tied for the highest median down payments in the country at 10%.)
“People don’t consider themselves homeownership candidates when in fact they are,” says Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute. “Even in areas of the country where it is much cheaper to buy than to rent, people think, ‘I can’t afford to buy,’ because they don’t have the necessary down payment. Whereas, in fact, given where down payments actually are, they do. It’s a huge deterrent.”
What accounts for this misunderstanding? For one, low down payments are a relatively new phenomenon. In 2006, just before the housing bubble burst, the median down payment was 20%. Additionally, a home buyer who puts down less than 20% often needs to buy private mortgage insurance, which protects the lender—not the homeowner—in the event of default and costs between 0.5% and 5% of the loan amount each year.
To be clear, all else being equal, a higher down payment is better. When interest rates are low, as they are now, it may pencil out to pay for mortgage insurance. But the math gets harder to justify if you are taking out a mortgage when rates are high. You may be charged a higher interest rate if you put down less than 20%, since some lenders view lower-equity loans as riskier. Starting with more equity gives both you and your lender some security if home values fall.
But building equity is also a key argument for why it pays to get into homeownership early—even if you haven’t saved $46,980 (20% of the median sale price of a home sold in April). According to the Federal Reserve’s Survey of Consumer Finances, the average homeowner’s net worth ($231,400) is 44 times the average renter’s ($5,200). The earlier you buy, the more equity you can build over time. You can tap into that equity in an emergency or in your retirement.
“My parents’ advice to me was ‘real estate is basically an elevator; all you have to do is get on,’” says Justine Boucher, a 31-year-old homeowner who realized she could buy a home after learning 20% was not a requirement.
Here are four ways to become a homeowner without a 20% down payment:
Government-Backed Loans
Borrowers with credit scores of 580 or above can put down as little as 3.5% on a Federal Housing Administration-insured loan. The upside is that it is typically easier to qualify for an FHA loan than a conventional loan with a private lender. The downside is that FHA borrowers who put down less than 20% are on the hook for private mortgage insurance, typically at a rate of 0.8%, until they refinance or pay off the mortgage. With a private loan, PMI is automatically canceled after equity reaches 78% of the purchase price.
Low Down Payment Conventional Loans
With home prices climbing since 2012, lenders eventually caught on to the fact that high down payment requirements were making it difficult to attract new mortgage customers. So around 2015, they began offering low down payment loans to borrowers with high credit and earning potential. Like the special mortgages that have long been offered to new doctors, who typically have substantial student debt and earn relatively modest salaries during their residencies, these loans often don’t require private mortgage insurance. Credit score and payment size requirements vary, and some programs require education for first-time buyers.
You can start your search by reading “12 Low Down Payment Mortgages, Including Some With Low Or No Mortgage Insurance” or “47 Low Down Payment Mortgages By State, Including 30 States With An Option For No Mortgage Insurance.”
Down Payment Assistance Programs
Down payment assistance programs, which provide grants or loans, are more available than ever before. There are now more than 2,500 down payment assistance programs across the country. Many help home buyers regardless of their income, although requirements vary. While there are some national programs, most are offered in individual states. Urban Institute researchers found that in 2017, 28% of mortgages originated in the New York metropolitan area were eligible for at least one down payment assistance program. Qualifying borrowers could have received an average of $13,546.
Silicon Valley
Numerous tech companies are looking to tackle the down payment problem. Unison Home Ownership Investors will match your 10% down payment in exchange for a share of the profit when you sell. Several startups are offering to essentially buy your home for you, with new-fangled rent-to-own programs. While there is certainly room for innovation in home finance, make sure to read the fine print before signing on with an untested model.