Urban Institute Paper Examines Barriers to Accessing Homeownership

In a new paper, the Urban Institute, Washington, D.C., examines three significant barriers to homeownership: saving for a down payment, accessing mortgage credit and housing affordability.

The paper, Barriers to Accessing Homeownership, also offers information about down payment assistance programs which can help borrowers overcome the first barrier to homeownership and data on the 21 million mortgage-ready millennials in 31 large metropolitan areas.

“Saving for a down payment is a considerable barrier to homeownership,” the paper said. “With rising home prices and interest rates and tight lending standards, the path to homeownership has become more challenging, especially for low-to-median-income borrowers and potential first-time homebuyers. Yet most potential homebuyers are largely unaware that there are low- and no-down payment assistance programs available to help eligible borrowers secure an affordable down payment.”

The paper said down payments are perceived to be a much bigger barrier to homeownership than they really are. Data show more than two-thirds of renters say saving for a down payment is an obstacle to homeownership; most (66 percent) are finding it somewhat or very hard to save for a down payment and most (65 percent) think they need to put at least 15 percent down.

In reality, the report said, median down payment today in the US in 2017 was 5 percent, compared to 20 percent in 2006. “While most low-down payment lending is done by FHA, the GSEs both have 3 percent down programs which have grown rapidly in recent years, from 1.2 percent in 2014 to 11.1 percent 1st half of 2018.

The report also said affordability has decreased in the past five years and is currently close to historic averages. Nationally, as of June, the share of median income needed for a 20 percent down payment on the median home was 23.3 percent vs. 18 percent in June 2012. With a 3.5 percent down payment, the income needed would be 18.1 percent. Yet, nationally, owning a home with a mortgage is still more affordable than renting. The median family spent 28.1 percent of its income to rent but only 26.8 percent for a monthly mortgage payment with a 3.5 percent down payment.

The report noted lenders have been less willing to lend to borrowers with lower credit in recent years. The median credits score for mortgages has increased 20 points over the past decade, preventing millions of potential homebuyers from obtaining mortgages. Nationwide, the median credit score was 738 in April compared to 705 in 2006.

Millions of millennials are mortgage-ready, the report said, with nearly 21 million mortgage-ready millennials in the 31 largest US cities, including 1.7 million blacks and 4.6 million Hispanics. In addition, UI said most of the mortgage-ready millennials in the U.S. earn enough to afford a typical house in their city, although this varies slightly by race and ethnicity.

The report also noted nationally, 2,527 programs provide grants and loans to make homeownership more attainable. Every state has at least two active programs with average assistance in various states ranging from a low of $2,436 in Dallas/Fort Worth/Arlington, Texas and in Indianapolis/Carmel/Anderson, Indiana to a high of $21,171 in Los Angeles/Long Beach/Anaheim, California and New Orleans/Metairie, Louisiana.

The report can be accessed at https://www.urban.org/research/publication/barriers-accessing-homeownership-down-payment-credit-and-affordability-2018.