Virtually every study that focuses on the challenge of transitioning renters into owners eventually identifies the ability – or more accurately, the inability — of young families to accumulate the savings needed for a down payment on a home they want to own.
Indeed, 50% of young renters in Fannie Mae’s National Housing Survey released in May cited “affording the down payment and closing costs” as the biggest obstacle to buying a home. The Fed’s Report on the Economic Well-Being of U.S. Households, released in July, revealed that 45% of renters surveyed said they were renting because they can’t afford a down payment.
Often overlooked in all of this analysis is how much savings young renters perceive is needed for a down payment. Are young renters even aware how much of down payment they need to buy a home? Are they aware that gifts, grants and other forms of down payment assistance may be available to them?
Remarkably, most of these young households don’t perceive making the monthly mortgage payment as a barrier. In fact, according to the Fed’s July study, only 18% of young renter-respondents felt it was cheaper to rent than to own. It’s as if young renters are saying, “Dude, I can make the monthly payment, but I just can’t afford the initial investment.” (Author’s Note: “Dude” added for effect based on interactions with my own Millennial offspring.)
Most young renters today seem to overestimate the amount of money needed to buy a home, and very few are aware that down payment assistance options even exist. Bottom line: As mortgage and real estate professionals, we need to do a better job showing creditworthy young families the well-lit paths to homeownership.
Certainly, at all times, we need to place the highest priority on the borrower’s well-being. Setting people up for failure by pushing them into a home before they are ready is wrong. On the other hand, we fail borrowers when we don’t consider all ways to help them overcome the down payment barrier. This is especially true in today’s low rate environment. As rates and home prices rise, buying power falls and accumulating savings becomes an even taller task.
So what are the options for today’s savings-strapped young renters? Try these:
- Start by educating young renters about today’s down payment requirements. Many renters may not need assistance and may be wholly unaware that there are programs that require down payments of as little as 5% and 3%.
- Down payment assistance (DPA) programs are available nationwide for a wide range of income levels, not just low-income households. According to Atlanta-based Down Payment Resource (www.downpaymentresource.com), there are roughly 1,700 programs available nationwide, and 90% of these programs are currently funded. While some DPA sources require regular repayment, many sources are forgivable or deferred until the borrower moves or refinances.
- Try your state or local housing finance agency (HFA). Every loan officer and real estate professional should know what their HFA has to offer. Many offer a very favorable 97% loan-to-value (LTV) ratio conventional loan (which MGIC insures) that may be paired with down payment and closing cost assistance up to 105% of value.
- How about a gift from a family member? Many mortgage programs available today allow gifts. MGIC, for instance, allows down payments to be fully gifted on loans we insure.
It starts with education. Demystify the process for these young renters who, according to the Fannie Mae analysis released in May, overwhelmingly (90%) want to own a home one day. And if a Millennial asks, “Dude, where’s my down payment going to come from?” sit down with them and explore all the alternatives that may be available.Tags: Down Payment, Fannie Mae, FTHB, HFA, Millennial, Mortgage Industry, Mortgage Programs, Renters, Top Content