First-Time Buyers Are Overcoming Their Down Payment Struggle

By Satinder Haer

The millennial generation is struggling to break into the housing market. Millennials, those between 23- and 34-years-old, are poised to be the next big wave of home buyers. However, many are coming up short on the necessary cash for a down payment due to high rental prices. Undeterred, millennial and first-time buyers are getting creative in order to escape the current rental crisis and become homeowners.

Rent prices have surged in recent years, preventing millennials from saving. Data shows that from 1985 to 2000, a typical renter spent 24.4 percent of their monthly income on rent. Current renters, however, can expect to put roughly 30 percent of their income toward housing—the highest percentage on record. All-time high rental prices coupled with stagnant wages over the last couple decades means that millennials must put more of their income toward housing than ever before and less toward savings. And without the savings for a down payment, they must continue to rent.

Despite their inability to save, millennials are the most eager group of potential home buyers. When surveyed, only 12.1 percent of the general population said they’d like to buy while 12.9 percent of millennials said they’d like to purchase a home this year. It’s unsurprising that millennials want to pursue homeownership, given their negative experience with rising rents and the current affordability of mortgages. Homeowners can expect to put only 15 percent of their monthly income towards their mortgage, considerably less than the average renter spends. Millennials who are able to purchase a home will likely spend less of their monthly income on a mortgage than they did renting.

Resourceful millennials are finding ways around the down payment hurdle. Many are using money from family and friends in the form of gifts and loans in order to put down 20 percent—the amount typically required to avoid mortgage insurance. A Federal Reserve Board survey shows that more home buyers are using loans and gifts from loved ones than they did pre-recession. Only 11 percent of first-time buyers from 2005 to 2007 relied on down payment assistance from their social network. Comparatively, 22 percent of the first-time buyers from 2012 to 2014 had down payment assistance. Millennials are keen to move into homeownership, even if it requires reliance on financial help from family and friends.

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First-time buyers without down payment assistance are also opting for loans that require less down payment savings. FHA loans are a popular option that only require 3.5 percent down. While first-time buyers who go this route also have to pay for mortgage insurance, it may be more favorable and economical than continuing to rent.

High rents and flat incomes pose a problem for renters who want to transition into homeownership. However, millennials who clear the down payment hurdle will most likely find that buying is a better bargain than renting on a monthly basis. With rents showing no signs of dropping, exploring alternatives to a traditional down payment is a promising path to homeownership.

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