The Down Payment Myth Stumping First-Time Homebuyers

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By Dave Liniger |

Even though the economy is in a slow-motion recovery, the real estate market is moving at full speed. Existing home sales in May ran more than 5 percent ahead of last year, which was already the best year for sales in a decade.

However, some Americans are notably absent from this measure of the American dream: first-time homebuyers. Historically, first-timers have made up 40 percent of all homebuyers. In 2015, they accounted for merely 30 percent.

With the benefits of homeownership, why the hesitation?

The answer boils down to lack of information. Many potential first-time buyers assume homeownership is only for the wealthy, who can afford a hefty 20 percent down payment. They feel in their gut what economists have verified — saving for 20 percent down on an average home with an average income could take a decade or more.

But the 20 percent down payment requirement is a myth. Mortgages for as little as 3 percent down are readily available.

Still, 73 percent of millennials have little or no awareness of such finance options. Last year, as many as a half a million potential first-timers may have delayed home buying because of what’s in their heads, not what’s in their wallets.

Most first-time buyers belong to the millennial generation — the 19-35 age group. The formative experience of their youth was the great recession, with its devastating foreclosure debacle.

They’re graduating from college with record-breaking student debt and entering the workforce to limited opportunity and stagnant wage growth. It’s not surprising that they’re getting married and having children later than previous generations. Although surveys reveal they aspire to be homeowners, they’re largely unaware of mortgages designed specifically for them.

For decades, the Federal Housing Authority supported mortgages with just 3.5 percent down — traditionally the mortgage choice for first-time homebuyers. Due to the great recession, lending standards became overly restrictive — but now are much more reasonable. In 2014, Fannie Mae and Freddie Mac began guaranteeing mortgages with down payments as low as 3 percent, available through responsible lenders nationwide.

Like all mortgages, low down-payment programs require good credit and verifiable income, and may impose additional requirements such as mortgage insurance. But combined with near historic lows in interest rates, they’re an attractive opportunity for first-time homebuyers.

What’s more, rents have been escalating faster than home prices. The percentage of an average income needed for rent often exceeds that needed for a mortgage payment. A low-down payment mortgage could actually improve monthly cash flow for many buyers.

Those pondering the prospect of homeownership should understand mortgage interest, property taxes, and some closing costs are deductible and can significantly reduce one’s tax bill. But there are a number of lesser-known advantages that warrant as much — if not more — consideration.

For many Americans, homeownership is the single greatest contributor to building wealth. The net worth of homeowners is far greater than of renters — a truth that persisted through the financial crisis. Additionally, homeownership creates a stronger neighborhood bond and is a predictor of positive outcomes for children. Children of homeowners are much more likely to finish high school.

The mistaken belief that a large down payment is required to buy a home is preventing many who are creditworthy from enjoying the benefits of homeownership. In reality, today’s real estate market is very receptive to first-time buyers. Millennials may be facing many challenges and uncertainties, but getting into a home of their own needn’t be one of them.

Dave Liniger is the CEO, chairman, and co-founder of RE/MAX.

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