One-Fifth of Home Buyers face Down Payment Issues
Finding enough money for a down payment remains the biggest obstacle for many home buyers, said Zillow Inc., Seattle.
A Zillow analysis of housing affordability found nationwide, cobbling together a 20 percent down payment on a home costs more than two thirds of the average annual income. Saving for a 20 percent down payment is the most pressing concern of one in five home-buyers.
In the U.S., to buy a median-priced home for $192,500, a buyer must pull together $38,500 in cash–plus any closing costs and moving expenses–to ensure they qualify and get the best terms on their mortgage.
Among large housing markets, buyers in the San Jose, San Francisco and Los Angeles metros must come up with the largest percentage of their income to buy a home–182 percent of the average annual income to put 20 percent down on the median home. In San Jose, where the median income is $105,455, a down payment on the median $961,600 home is $192,320.
Buyers in Pittsburgh, Indianapolis and Kansas City set aside the smallest chunk of their income for the ideal down payment, representing 48 percent of the median annual wage.
“Saving enough cash for a down payment is a major barrier to homeownership, especially in expensive markets, where a 20 percent down payment can cost nearly $200,000,” said Zillow Chief Marketing Officer Jeremy Wacksman. “While it’s possible to buy a house with a smaller down payment, 20 percent ensures the best rates. As important as it is to find a monthly payment you can afford, some buyers’ budgets will come down to the amount of cash they can bring to the table.”
Should mortgage interest rates rise in 2017 as expected, Wackman said, a solid down payment will become increasingly important. “While it is possible to put down as little as 3.5 percent on a home, the trade-off is a higher interest rate and costly private mortgage insurance, he said. “A better interest rate can translate to thousands of dollars over time; on a $200,000 loan, lowering the interest rate by half a percentage point will save $20,000 over the lifetime of the loan.”
The report noted nearly half of all home buyers are buying a home for the first time. “Those buyers can’t rely on the equity in their current home and must come up with the cash to get into the housing market–often while paying record-high rents,” Wackman said.
One in five home searchers said saving for a down payment is their top concern about the home-buying process, second only to finding an affordable home, which was their top concern. A majority (56 percent) saved for their down payment by setting aside a little money at a time. One third of buyers used more than one source of funds for their down payment, combining savings with gifts and loans from family and friends or cashing in their retirement.
