Homebuyers' Down Payments Shrink For The First Time In Two Years, Even As Prices Rise

The typical homebuyer's down payment has shrunk by 1% year-over-year according to a new report from Redfin RDFN. This is the first annual decline in almost two years.

Median down payments now sit at $62,428, or 15% of the total home value. That percentage hasn't meaningfully gone down— a year earlier it was 15.1% — but the dollar amount has.

According to the report, the last time dollar-amount down payments decreased was in the summer of 2023. At that time, home sale prices were shrinking, resulting in lower payments. Now, home prices are rising, jumping by 1.4% year-over-year in April.

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So what's keeping down payments from rising right along with home prices? It turns out there are a number of factors at play.

For starters, the way people are paying for homes is changing. According to Redfin, nearly one-third of buyers are paying in cash, meaning they aren't putting up a down payment. Those who are buying homes with a mortgage seem to be purchasing cheaper properties, which explains a lower dollar amount down payment.

As interest rates linger around 7% and economic uncertainties persist, Redfin found that prospective buyers were more sensitive to cost. Mortgaged homebuyers seem more inclined to keep additional cash in their bank accounts, rather than splurge on more expensive real estate.

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Additionally, Redfin said that the number of buyers using Federal Housing Administration and Veterans Affairs loans to purchase homes has increased over the last year. Mortgaged sales using an FHA loan went up by 1.1% year-over-year, and those using a VA loan are at the highest level since 2020. These financing options require lower down payments, which helps to push the overall dollar amount spent on down payments.

Finally, as the overall housing market cools down and sellers begin to outnumber buyers, Redfin says that many homeowners are more willing to negotiate with buyers. These negotiations can include accepting lower down payments in order to capture a sale.

"The buyers who are moving forward today are being very careful with their finances because with housing costs near record highs, they're typically spending a big portion of their paycheck to buy a home. I'm seeing an uptick in first-time buyers looking for starter homes," Redfin agent Fernanda Kriese said in the report. "Combine that with concerns about layoffs and a potential recession, and people are doing things like cross-comparing mortgage origination fees, shopping around for lenders, and looking into down-payment assistance."

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