Down payments on homes are getting larger. But there are ways to reduce up to 1%.
Written by Aarthi Swaminathan
“You have to make your offer look as good as possible” with competition for low inventory, says an economist with the National Association of Realtors.
As mortgage rates rise over the course of this year, homebuyers have increased the amount of money they pay when purchasing a home, according to a new report.
The share of a home’s asking price that buyers pay as a down payment has risen to its highest level since 1997, according to a report released by the National Association of Realtors on Monday.
In its annual profile of home buyers and sellers, the real estate industry group found that the typical down payment for first-time buyers rose to 8% in 2023, up from 6% last year.
This is less than most people assume they need to leave behind. Most housing affordability calculators assume a down payment of about 10% to 20%, and 35% of people believe they need to put down 16% to 20% to buy a home, a 2022 NAR survey found.
Down payments can be as low as 1%
But it is possible to put out much less. Some lenders, like Zillow (ZG) and Rocket Mortgage, offer 1% down payments to make home buying more affordable in this market. First-time homebuyers with an FHA loan can pay up to 3.5%, for example. The only problem is that buyers will need to pay mortgage insurance which will protect the lender in the event they are unable to pay.
NAR noted that the typical down payment for repeat buyers was 19% in 2023, the highest share since 2005. The typical down payment for repeat buyers was up from 17% last year.
As home prices continue to rise, and mortgage interest rates hover around 7.5% – the highest level in 23 years – the housing market has become increasingly unaffordable for many homebuyers. A decline in the number of homes for sale causes prices to rise as buyers compete for a small number of listings.
“More skin in the game”
This is part of the reason for the increase in down payments, NAR noted. Buyers may offer more cash up front to make competitive bids.
“The down payment has either declined or remained flat since 2005, but the past two years have seen an increasing trend toward higher down payments with a more competitive market and more equity gained from the previous sale of the home,” the NAR report stated. .
“If you’re in a multiple-offer situation, you have to make your offer look as good as possible,” Jessica Lautz, deputy chief economist and vice president of research at NAR, told MarketWatch. “So maybe that means more skin in the game and a higher down payment.”
Because of the high cost of homeownership, today’s typical homebuyer needs to earn $107,000, compared to $88,000 last year, to afford monthly payments on a median-priced home, the association said. Experts generally consider a home affordable if the buyer does not spend more than 30% of their income on monthly payments.
Repeat buyers, on the other hand, “have the advantage of leveraging a tremendous amount of residential equity from their last home,” Lautz said. She noted that some have enough equity to forego taking out a mortgage, with 20% of homebuyers generally paying all cash.
But saving money for a down payment is the hardest step for 38% of first-time homebuyers, NAR found in its survey. Prospective first-time buyers said the biggest obstacles to saving to buy a home include a current rent payment that is too high, student loan debt, and car loan debt.
More than half of buyers, 54%, use their savings to finance the down payment.
First-time buyers also increased their reliance on financial assets this year, with 11% selling stocks or bonds to raise money for a down payment, 9% tapping into their 401(k) or pension, and 2% using their IRA, NAR said. . And 2% selling cryptocurrencies.
-Aarthi Swaminathan
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