The surge in home prices has also led to a noticeable increase in down payments, a trend that’s catching the attention of many prospective buyers. According to Redfin’s latest report, the median down payment in December reached $63,188, marking a 7.5% hike from the previous year, which translates to roughly $4,000 more. Chen Zhao, an economist at Redfin, explains that this increase is primarily a reflection of the rising home prices.
Aside from escalating home prices, buyers today are grappling with high inflation, fluctuating mortgage rates, and limited savings. Data from Redfin shows that in December, the typical down payment was about 16.3% of the home’s purchase price, with the median home-sale price standing at $428,000.
Despite more cash being shelled out for down payments, they continue to pose a significant barrier. A recent Bankrate report highlights that 81% of potential homebuyers see down payments and closing costs as hurdles to homeownership. For over half, these hurdles are “very significant,” while nearly 30% view them as “somewhat significant.” This finding is based on a survey conducted by YouGov Plc, which polled 2,703 U.S. adults in January.
There are, however, opportunities for those interested in low or no-down-payment loans. Federal agencies, including the Fair Housing Association, the Department of Veteran Affairs, and the U.S. Department of Agriculture, offer various programs. For instance, eligible veterans can take advantage of VA loans with zero percent down. Similarly, USDA loans are designed to help buyers purchase homes in rural locales, also requiring no down payment. Meanwhile, FHA loans, which cater to first-time buyers and those with lower to moderate incomes, often require just a 3.5% down payment.
Melissa Cohn, regional vice president at William Raveis Mortgage, cautions that “you don’t get anything for free,” highlighting the potential downsides of low-down-payment programs. It’s pertinent to note that while such options can open doors to homeownership, they might come with additional financial obligations. Less upfront cash means borrowing more, resulting in higher monthly payments and possibly elevated mortgage rates.
In recent times, a greater number of homebuyers are opting for government-backed mortgage options. Redfin reports an increase in FHA loans, which made up 15% of mortgaged home sales in December, climbing from around 10% mid-2022. Similarly, VA loan use has nudged up to 6.7%, compared to 6.2% the year prior. Zhao from Redfin suggests this trend may indicate that buyers have more leverage, especially since sellers typically avoid FHA loans due to their longer processing times. In a fiercely competitive market, this can be a drawback.
While making a small down payment might make initial home buying accessible, it often comes with recurring expenses. When a buyer puts down less than 20%, they’ll likely have to pay private mortgage insurance (PMI), which could add $125 to $375 to the monthly mortgage bill, depending on factors like credit score and the size of the down payment, as per The Mortgage Reports. On a $300,000 loan, PMI could range from $1,500 to $4,500 annually.
By contrast, those who can contribute a 20% down payment often enjoy benefits like lower interest rates and fees, as lenders view them as less risky. While a 20% down payment sounds daunting, it’s not an absolute requirement for buying a home.
The perception about the time it takes to save up for a down payment varies. Bankrate’s survey reveals that many feel it could take years. Yet, “time isn’t necessarily a nemesis,” remarks Mark Hamrick, a senior industry analyst at Bankrate. He points out that having time can be advantageous—buyers can focus on reducing debt and improving credit scores, thereby securing better mortgage terms.
In the interim, potential buyers should explore down payment assistance programs offered by states or local agencies. Beyond federal options, these programs can provide grants or loans to help manage down payments and closing costs. As Hamrick suggests, knowing and leveraging these resources is crucial. “The federal government isn’t the only game in town,” he notes. Browsing state agency websites can uncover opportunities for financing support, making homeownership achievable for those finding it hard to save enough initially. As Cohn adds, these options are beneficial for those without the luxury of substantial savings.
