There comes a point for many prospective first-time homebuyers when nearly everything you do is focused on saving for that purchase. Even when you've been putting money away regularly for years, you find yourself willing to cut out that beach vacation you had been planning, eating in more and even take on a part-time job to help close the gap between you and homeownership.
But even though you've carefully considered what you can afford and will qualify for in terms of monthly mortgage payments, the down payment remains a hurdle you, like most first-time buyers, struggle with.
How Much Do You Need for a Down Payment on a House?
As housing inventories remain low in major markets throughout the U.S. and home prices continue to rise, the difficulty of saving for a down payment grows. The standard down payment for a conventional loan is 20% of the home's purchase price. Lower mortgage down payments are available, however, in programs that may include a higher interest rate or require private mortgage insurance.
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On a national scale, it takes 14 years for a median-income household to save enough for a 20% down payment on a median-priced property, according to homeownership investment company Unison in its 2019 Home Affordability Report. For first-time homebuyers trying to save for a down payment, the prospect of having to sacrifice more or lower their expectations can be disheartening.
"Without any changes to the market or some special things happening to the homebuyer, sacrifices are necessary in order to actually make it a reality," says Judd Schoenholtz, co-founder and CEO of online real estate brokerage Open Listings, which represents buyers in transactions on the West Coast.
In real estate information company Zillow's Consumer Housing Trends Report for 2019, 34% of homebuyers who financed their purchase used gifts or loans from friends and family to help afford their down payment.
Low Down Payment Options: 0% and 3% Programs
There is some respite for first-time homebuyers when it comes to borrowing options, with the growth of low down payment mortgage programs. Mortgage options requiring less than 20% down include loans through the Department of Veterans Affairs, the Federal Housing Administration, the Department of Agriculture or the purchase of private mortgage insurance. Some of these programs allow homebuyers to get financing with as little as 3% ( or even 0%) down.
These options are "key products for first-time homebuyers," says Tian Liu, chief economist for Genworth Mortgage Insurance. Genworth recently released its second-quarter 2019 report, which notes 559,000 first-time buyers purchased single-family homes between April and June. Of those purchases, 424,000 were financed with low down payment mortgages.
The growth in low down payment programs is a turnaround from the recession, when lenders wouldn't move on many deals without perfect credit and 20% down. But today, first-time homebuyers are often the ones to hold off on making a deal based on financial uncertainty. When mortgage interest rates hit 5% at the end of 2018, many homebuyers considered it a breaking point for affordability and stopped shopping.
Lenders have since lowered their interest rates, and Liu says rates are still falling to around 3.6% or 3.7% for the third quarter of 2019, compared to 4% in the second quarter. But first-time homebuyer activity hasn't fully recovered. Even more so than down payments, Liu says: "That tells us that affordability is really the pain point for many first-time homebuyers."
What Do You Need to Buy a House?
With a 3% down payment for a $300,000 house or condo, you'll need just $9,000 in cash instead of the $60,000 in a standard 20% down payment. The mortgage insurance required with most types of low down payment programs increase your monthly payment, but you can have less savings and still reach your goal.
However, a smart homebuyer will save even more. The last thing you want is to move into a house with no money in the bank only to sustain roof damage in a storm three weeks later.
How to Save for a House
What are your saving options? For the most part, they're the same as saving for any other reason: taking a bag lunch to the office instead of eating out every day, cutting cable or online subscriptions and canceling a gym membership.
According to the National Association of Realtors' 2019 Home Buyers and Sellers Generational Trends Report published in April, 54% of buyers age 28 or younger made sacrifices to afford a home, as did 50% of buyers between 29 and 38. The most common methods for saving were to cut spending on luxury or nonessential items, entertainment and clothes, as well as making minimum allowable bill payments. For those under 28, 10% reported they earned more to help save by getting a second job.
As you save for the home you want, keep in mind that not everyone qualifies for the same mortgage program. It would be upsetting to save for a 3% down payment, only to find out you don't qualify for a 3% down payment program when you're ready to start shopping. Speaking with a financial advisor or housing counselor can help you determine the best options for you while you're still saving. The U.S. Department of Housing and Urban Development has a list of approved housing counseling agencies that offer free services to residents.
For that reason, it's important to keep an open mind about the type of house you'd like to buy. Consider adjacent neighborhoods, fixer-uppers or fewer bedrooms to find a more affordable home. Offsetting the cost of owning a home after you purchase is where Schoenholtz says "the creativity steps in." Rather than buying a single-family home, he sees younger buyers looking for a property with an apartment that can be rented out or a garage studio where a business can operate.
Liu stresses that the first home you purchase is often a stepping stone to building equity and wealth, from which you can purchase future homes that better suit your needs and desires. "There's this romantic notion that this is going to be your forever home ... and that's really not the case," he says. "Start with something affordable and build from there."
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