Down Payment Dilemma Growing for First-Time Buyers

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The struggle to afford a home often centers upon the down payment, which can range from 3.5% to 5%. On a modest $250,000 home that can run from $8,750 to $12,500 – A large sum of money for someone making $50,000 to $65,000 a year.

That amount can be even harder to accumulate if you’re saddled with student loans. And recent figures suggest that first-time home-buyers are going to need to save even more.

We turn to Jacob Passey at MarketWatch to fill us in on how down  payment savings issues are only going to get worse.

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Growing Down Payment Dilemma

Take Maayan Simckes, a 28-year-old PhD candidate who lives in Seattle as an example. She and her fiancé ideally want to buy a home within the next few years, but worry about rising costs. “With our current income, there’s no way we’re going to be able to keep up with the rise in housing prices,” Simckes said.

Home prices are expected to continue rising in the year ahead. That means buyers will have to work even harder to build up a down payment. Real-estate website Zillow predicts that home buyers there will need to save an additional $394 per month to keep pace with rising prices.

A similar situation is playing out across the country: The median home price nationwide is expected to grow by $6,275 over the next year, according to Zillow.

As a result, the average American home buyer would need to squirrel away an additional $1,260 — or $105 per month — to account for a 20% down payment on a home purchase a year from now.

In Maryland, there are loan programs that can reduce this amount to 3.5% to 5%. But its still a large chunk of change for first-time homebuyers

The challenge of saving fast enough to keep up with home price appreciation is even more intense in some of the country’s hottest real estate markets. In San Jose, Calif., the median home value is expected to go up by nearly $36,000 in the next year. That means buyers would need to save an additional $599 per month to meet the increased down payment.

“It’s a moving-target kind of problem,” said Skylar Olsen, a senior economist at Zillow. “That’s thousands of dollars extra just to keep up with what home values are doing, regardless of whether you had anything saved in the first place.”

Extra Monthly Savings Needed to Keep Up

Here’s the extra amount home buyers will need to save to build a 20% down payment that keeps up with property price appreciation in the nation’s largest metropolitan areas:

 Metro Area Extra Monthly Savings Needed
New York $228
Los Angeles $125
Chicago $117
Dallas-Ft. Worth $165
Philadelphia $74
Houston $84
Washington, D.C. $154
Miami-Ft. Lauderdale $68
Atlanta $160
Boston $206
San Francisco $192
Detroit $87
Riverside, Calif. $266
Phoenix $113
Seattle $394
Minneapolis-St. Paul, Minn. $96
San Diego $267
St. Louis $55
Tampa, Fla. $106
Baltimore $127

Note that Baltimore is somewhere around the middle of this list. It means that first-time homeowners in the Central Maryland home market are going to need to save an additional $1,524 annually. 

Millennials like Simckes are being forced to play a waiting game. It’s getting harder and harder for them to save.

Young adults who don’t already own homes are delaying purchasing one for a median of seven years. This is according to a recent joint study on millennial student debt from the National Association of Realtors and education financing nonprofit American Student Assistance.

Student Debt Aids in First-Time Homebuyer Reduction

Student loan debt is the main culprit sapping home buyers’ saving power. Altogether, 83% of non-home owners said they believe that student loan debt has delayed them from buying a home. This is according to the survey of 2,203 student loan borrowers.

This was the case for Amanda Rosemore, a 27-year-old airline sales analyst from Atlanta, when she went to buy a condo a couple of years ago. “One of the biggest challenges was paying down the student loans fast enough so I could have some room to save for a down payment,” she said.

The rising cost of rent made saving that much more difficult. Rosemore resorted to hoarding her tax refunds and extra income she received through her company’s profit-sharing program.

What’s more, nearly two-thirds of respondents in the survey from National Association of Realtors and education financing nonprofit American Student Assistance (61%) said they couldn’t afford to contribute to a retirement account at times because of their student loans. And a full 72% said their debt affected their decision to take a vacation.

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There is Help Out There for Down Payments

Down payments aren’t the only cost of buying a home that needs to be considered. Closing costs can equal and exceed that, adding another 3%-5% to the amount needed to settle.

A good Realtor can help minimize this with a creative offer, but the costs can still be a burden.

Additionally, there are a number of low down payment loan programs that can help first-time homeowners reduce the down payment savings dilemma.

At Wissel Homes we always suggest starting your home search process by sitting down with your Realtor, and then a good loan officer. (We say Realtor first because we have a good rolodex of Mortgage specialists who work consistently with first-time homebuyers.)

A good loan officer will work with you – with your credit score if it needs help –  and can give you information on unique loan programs that have lower down payments.