Tackling Home Financing and Downpayment Misconceptions
This is a reprint of a National Association of Realtors Article
Despite the current hype around home buyers paying all-cash for homes, the majority of home buyers finance their home purchase. Among primary residence buyers, 87% percent financed their home purchase, a share that rises to 95% among first-time buyers. When financing a home, buyers typically put down a downpayment, but how much?
One of the biggest misconceptions among housing consumers is what the typical downpayment is and what amount is needed to enter homeownership. Having this knowledge is critical to know what to save and to estimate how long that may take. As 2022 starts, many potential first-time buyers may have the goal of saving for a home, so let’s take a look at the data.
When surveyed, 35% of consumers think they need 16% to 20% for a downpayment and 10% of consumers think they need more than 20% for a downpayment. With that expectation in mind, it may seem incredibly discouraging to imagine saving for a home or condo. Seeing reports of rising home prices may make that goal appear even further from reach.
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However, in actuality the typical downpayment for first-time buyers has ranged between six to seven percent since 2018. Historically, the typical downpayment has only been as high as 10% when NAR first started collecting this data series in 1989. For repeat buyers, the typical downpayment was 17% last year. In recent years, the down-payments for repeat buyers have steadily increased as housing equity for owners has grown. In 2014, repeat buyers put down only 13% for a downpayment.
Buyers have many loan options. The majority of all buyers use conventional financing to purchase a home. Among first-time buyers, 23% used an FHA loan. FHA loans allow borrowers to put down just a 3.5% downpayment. A mortgage broker or housing counselor can discuss loan options available to buyers. Another resource to research for potential home buyers is HUD.gov. There is an interactive website that directs potential buyers to state and local programs that buyers may qualify for. Programs may be available in local areas for assistance with downpayments, student loans, property taxes, and home renovations.
The last question may be how does one come up with a downpayment? For four-fifths of first-time buyers the downpayment comes from savings. The share of first-time buyers who used savings for a downpayment last year rose and has been incrementally increasing since 2016. It may be that the pandemic helped buyers save as they cut back spending on entertainment, clothing, and restaurants as they stayed home more often.
Twenty-eight percent of buyers were able to use a gift from friends or relatives. The share receiving family help has remained relatively steady since 2003, though it did rise to a high of 36% in 2010. In 2010, there was a jump in first-time buyers entering the market with the First-time Home Buyer Tax Credit. Family may have encouraged buyers to enter and provided any help they could at the time.
The share of first-time buyers who sold stocks or bonds for their downpayment has doubled since 2003 from 6% to 12%. Similarly, the share of first-time buyers who used their 401k/pension fund for their downpayment rose from 7% to 10%. This may be due to the increased number of younger investors or the rise in stock values. Additionally, due to higher home prices, buyers may need to use multiple sources to put together a downpayment.