Less than Half of Home Buyers Make 20% Down Payment

Conventional wisdom suggests home buyers make a 20 percent down payment. In reality, said Zillow Inc., Seattle, fewer than half of home buyers, especially Millennial home buyers, do so.

Millennial home buyers are least likely to put a 20 percent down payment on a home, but they’re also most likely to get financial help from family or friends to make up the difference, Zillow said. First-time home buyers are also more likely to cash out investments or use retirement funds toward a down payment, the company’s Consumer Housing Trends Report said.

The report analyzed home buyers nationally and in five major metro areas–Atlanta, Chicago, Washington, D.C., Phoenix and San Francisco–and their decisions about their down payments, including how much they put down and where they got the money. The survey revealed that just as U.S. housing markets vary greatly by region, so do down payment trends.

The report found just 43 percent of buyers nationally put down 20 percent or more, the survey data show. Atlanta and Phoenix had the smallest share of buyers, at just over 30 percent. Buyers in Phoenix were just as likely to put down 5 percent or less as they were to put down 20 percent or more. Even more concerning, said Zillow Senior Economist Aaron Terrazas, are buyers in Atlanta, who put down less than 5 percent more often than they put down at least 20, “which opens them up to greater risk of becoming underwater on their mortgages.”

Buyers in Chicago, San Francisco and Washington, D.C., however, are at least as likely as the typical national buyer to put down at least 20 percent.

Zillow said it takes more than seven years for a typical American home buyer to save a 20 percent down payment on the typical-valued home. In some markets it’s much higher; San Francisco, for example, pencils out to more than 18 years to save the $193,440 needed. Still, more than half of buyers there put down 20 percent or more. So how do they manage that significant barrier to home ownership?

The Consumer Report found savings still account for the largest chunk, with 70 percent of buyers nationwide saying savings made up at least some portion of their down payment. Second (39 percent) was proceeds from a previous home sale, which typically accounted for about 20 percent of the total down payment. Fifty-one percent said their down payment included a gift and/or loan from family or friends.

For Millennial buyers–the largest group of buyers and the most likely to use multiple funding sources for their down payment–nearly half used a gift or loan from family or friends for at least a portion of their down payment, accounting for one-fifth of the down payment on average. Other responses included investments and retirement funds.

“Saving up for a down payment can be tough and requires good budgeting and long-term planning, especially when for many of us the cost of rent and everyday life outpaces what we’re able to put in the bank,” Terrazas said. “There are many mortgage options that require less than 20 percent down, but buyers should be careful that they don’t set themselves up to be underwater.”