Younger Buyers Opting Out of Home Purchases Due to Down-Payment Myths
by Carole Ellis
According to the National Association of Realtors (NAR), more than one in every five potential home buyers is opting out of exploring their potential to buy a home without doing the proper research because they believe that the down payment will be prohibitively expensive. The NAR’s 2017 Aspiring Home Buyers Profile report indicates that more than a third (39 percent) of non-owners said that they believe they need more than 20 percent of the total purchase price of their home in order to buy one. A quarter believe they need to put down between 15 and 20 percent, and a fifth believed that they needed between 10 and 14 percent.
In 2016, the average down payment was 11 percent, and it is frequently far lower for first-time homebuyers who qualify for special mortgage programs. 99 percent of buyers under the age of 35 actually put down less than five percent on their mortgages most of the time last year, thanks in large part to “three-percent-down” programs backed by Fannie Mae and Freddie Mac. These young buyers, who are usually first-time buyers, also often qualify for the Federal Housing Administration (FHA)’s 3.5-percent-down program. Buyers who are not making their first purchase also may qualify for Department of Veteran’s Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans, both of which offer eligible buyers low- and even no-down-payment options.
Aspiring buyers also said that they probably would not be able to purchase a home because their credit scores were too low. It is true that buyers need more solid credit than they might have in the early- and mid-2000s, but Jonathan Smoke, Realtor.com’s chief economist, noted that borrowers with scores as low as 630 were getting approved for loans in 2016. Smoke summed up the situation this way: “For the millennial dreaming of buying a home this year, you need a FICO score of at least 639 and enough money that you could put down at most 5 percent. If you live in a typical American town, what you need could be as little as $3,500.”
Another issue for first-time buyers in particular, most of whom tend to be “millennials” between the ages of 18 and 34, is likely that their ideas about what type of home they want are very different than a traditional first-time buyer’s. Although plenty of evidence indicates that millennials are eventually going to move in large numbers to the suburbs and forgo their urban living preferences in order to raise families, they place a great deal of value on putting “personality” in to their homes and may not be willing to purchase a “starter home” if they believe that they will be able to purchase something closer to their goals in a few years. Also, they value technology and amenities that do not come cheap, although the energy efficiency that this generation values can make homeownership less expensive over time. Home Depot chief marketing officer Kevin Hofmann noted that they also want more options in their homes. “Five styles of granite used to be sufficient, but the company may now have to offer 30 types,” he explained. With these types of requirements for choices in a new home, first-time buyers simply may have to save longer, even with lower down payments, than they would if they were buying Smoke’s “typical” starter home with $3,500 down.
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