How To Come up with the Down Payment
For many prospective homebuyers, saving for a down payment can be a struggle. But without the necessary upfront finances, the dream of homeownership can be difficult to achieve.
This especially is true for younger house hunters. According to a recent survey published by Trulia, 60 percent of millennials (aged 18 to 34) indicate that finances are the largest sole barrier preventing them from owning of home (approximately 50 percent of respondents said they would turn to parents or grandparents for financial assistance to purchase a residence). Further, a newly published report from Harvard’s Joint Center for Housing Studies revealed that mounting student-loan debt likely would delay homeownership for the group.
It’s simply harder for today’s buyers to come up with the necessary down payment, particular Gen Yers, says Carole Short, a Realtor with Coldwell Banker Residential Brokerage in Atlanta.
“Many Millennials are straddled not only with consumer debt but student loan debt payments. With the cost of living going up for the basics – housing, food, phone … today’s buyers often are struggling financially and living paycheck to paycheck,” Short says.
While low- and no-money-down loans were offered aplenty prior to the housing downturn, most lenders today typically require at least 20 percent down—which is the minimum needed to avoid having to pay costly private mortgage insurance. However, an FHA loan requires only 3.5 percent down, and many conventional loan programs stipulate as little as 5 percent down.
Beginning to save now, with the goal of purchasing sooner, is a smart move given the continued climate of favorable mortgage interest rates, say the experts.
“The idea is to buy now. Rates are low, and real estate is a great investment that accumulates equity,” says Yael Ishakis, vice president at First Meridian Mortgage in Pomona, New York.
Saving, however, often requires homeowner hopefuls to make sacrifices. Alarmingly, the aforementioned Trulia survey reported that many Millennials aren’t prepared to give up the following to save for a down payment: car (65 percent); smartphone (45 percent); cable (20 percent); Netflix subscription (15 percent); and vacations (14 percent).
“Unlike baby boomers, who wanted to strike out on their own, millennials aren’t as eager to cut the apron strings or give up some of their indulgences. But cutting back on eating out, cable, shopping and even that morning cup of coffee can all add up,” says Sheryl Simon, a principal Benoit Mizner Simon and Co., a real estate firm in Wellesley, Massachusetts.
Those determined to purchase also have to be willing to prioritize goals, work hard, and seek assistance, Simon adds.
“Rent a smaller apartment that is lower than your actual budget. Take on an extra job you can fit in on the side. If you’ve just tied the knot, try not to spend all your gift cash on a honeymoon. And speak to a financial planner to set goals and guidelines to put you on a path to homeownership,” says Simon.
Lastly, be prepared for other essential items you’ll need to salt away funds for aside from the down payment, including closing costs (often 2 to 3 percent of the loan amount), furniture, and home improvements you may need to make after purchasing.