First-time homebuyers face many obstacles, but perhaps the most frustrating one is accumulating down payment money.
Traditional loans require a 20 percent down payment. Using Zillow's $229,800 median home sale price for November 2018, that's over $45,000. In many urban markets, a 20 percent down payment will easily top $100,000.
How long will it take you to save up a down payment given today's median homebuyer income of $72,500? According to Zillow Research, you'll need 7.2 years on average with today's median home prices. That's 1.5 more years than it took in 1988, when the median home value was $79,400 and the median homebuyer income was $28,100.
Since 1988, the median home value has increased by a factor of 2.8 while median homebuyer income increased by a factor just below 2.6. However, overall debt obligations have exploded. America's household debt (excluding mortgages) was just under $732 billion in 1988. As of November 2018, household debt was nearly $4 trillion.
It's hard to save anything when you're already in significant debt.
In markets with soaring home prices, the difference between 1988 and 2018 saving requirements far surpasses the 1.5-year average. In three large California markets, it takes over five times as long. The difference in San Francisco is 8.5 years, Los Angeles requires 9.5 extra years, and San Jose requires an extra 13.3 years — enough to make many potential homebuyers give up and look for long-term rental options.
However, the story is not all gloom and doom. The increase is less than a year in some large markets, including Chicago, IL (0.5 years), Kansas City, MO (0.7 years) and Houston, TX (0.4 years). In four markets, the down payment savings time actually decreased: Dallas, TX (0.1 years), San Antonio, TX (0.4 years), Indianapolis, IN (0.6 years) and Austin, TX (2 years).
How do first-time homebuyers reach their home buying goals under these conditions? Start by considering loan options. You may qualify for FHA, USDA, VA, or other low-down-payment loan programs designed to help homeowners overcome down payment roadblocks.
You won't be alone. According to Genworth's December 2018 First-Time Homebuyer Market Report, on the historical average, 74 percent of first-time homebuyers bought homes with down payments below 20 percent. In Q3 2018, 80 percent of first-time homebuyers used low-down-payment options.
Compare the restrictions and requirements of low-down-payment loans to see if you're better off buying now or waiting.Use an online mortgage calculator to run different scenarios on future home prices, interest rates, and your likely future wages. Is it smarter to buy a smaller and more affordable home now, or wait until you're in a better financial position and hope for a favorable housing market?
If you do proceed with a low-down-payment loan, remember that you're borrowing a higher percentage by definition. Be sure you can handle the debt load and interest charges over the long-term. Don't forget to factor in the mortgage insurance typically required by lenders to reduce risk associated with low down payments.
Even at the 3.5 percent minimum down payment of the FHA program, down payments can still present a challenge. Remember that the key word in any down payment strategy is "saving."
Set up a budget that allots a certain percentage of your income to save up for a down payment — keep that saving strategy after you buy a home. Use the surplus for retirement savings as well as an emergency fund, because we guarantee that once you're a homeowner, you'll appreciate the need for emergency funds.
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