Down Payments: Helping Future Borrowers Bridge the Awareness Gap
Over the course of my years in the mortgage industry, I’ve seen folks struggle to cobble together money for a down payment. I’ve wondered how many others put aside their dreams of homeownership because of a misconception that they’d never be able to save enough in time.
Even with the tools available to lenders now—such as down payment assistance and educational programs—I worry that many qualified borrowers are slipping through the cracks and missing out on the opportunity to build wealth and financial stability through homeownership. This isn’t an unwarranted concern—an average of 36% of owner-occupied purchase transactions in 31 large metropolitan areas were eligible for down payment assistance across all loan types based on 2018 Home Mortgage Disclosure Act (HDMA) data, and the numbers increased to 70% or more for Federal Housing Administration (FHA) borrowers, according to a recent Urban Institute report.
How uncertainty and misconception derail down payment saving
The most damaging down payment myth—since it stops the homebuying process before it can start—is the belief that 20% is necessary. According to the Urban Institute report, 39% of renters share that belief. The same survey showed that 68% of renters cited saving for a down payment as an obstacle to homeownership.
More than ever, first-time homebuyers need an accurate, realistic understanding of down payments because the cost barrier to the housing market is higher than in years past.
Home prices have grown four times faster than household income. Add to that the fact that today’s first-time homebuyers are struggling with student loan payments, higher rent costs, and stagnant salaries.
Saving 20% can be daunting as it could take as much as 10 years in some parts of the country.
Educating on not just the “how” but the “why”
As consumers weigh the decision of whether to move forward with a lower down payment, sometimes it’s helpful for them to consider the bigger picture of homeownership to formulate a down payment strategy. For example:
- According to the Freddie Mac survey:
- The share of low down payment lending has increased since 2008, with the standard FHA down payment at 3.5%; the GSEs also recently expanded their 3% down payment programs.
- The perception is that renting is more affordable, but renters are more cost-burdened than buyers in most geographic areas, and substantially so in high-rent metropolitan areas.
- In 2017, the share of people eligible in select MSAs ranged from 22 to 51%, with the average eligible homebuyer qualifying for assistance ranging from $2,000 to more than $60,000.
- Last year the median down payment was 12% overall and 6% for first-time buyers, according to the National Association of Realtors.
- A down payment can come from many sources beyond personal savings, such as assistance programs, gift money, seller contributions or cash from a previous sale.
- When considering loan-to-value ratios, a lower down payment has often become a way for many to get into homeownership faster and start building equity, which is a major component of wealth for Americans.
- For consumers living in areas where home appreciation value is reliably high, lower down payments can actually increase return on investment.
Down payment assistance programs and closing the awareness gap
Down payment help is out there, with more than 2,500 active programs across the country with more than 1,300 agencies offering them at the local, state and national levels. Also, lenders and other industry organizations are partnering on initiatives that focus on saving behaviors for potential homeowners. Some of these programs help borrowers automate a savings plan for sustainable homeownership, provide access to HUD-approved homebuyer counseling, and establish a savings match up to $2,500 to be used toward down payment or closing costs.
Lenders and other mortgage professionals can play a significant role in shaping how borrowers of the future approach homeownership. They should leverage resources that:
- Match eligible homebuyers with down payment programs through an automated process.
- Offer step-by-step homebuying guidance that help future borrowers make informed decisions.
- Provide awareness and information about working with housing finance agencies.
With rising home prices and more impediments to saving, down payment assistance programs can help potential homebuyers overcome this hurdle to achieve homeownership and build wealth and financial stability.