Home buyers are struggling to make bigger drops

Home prices are rising, so payments are falling.

A recent report from Redfin shows that the median down payment for home buyers in December was $63,188. That’s an increase of 7.5% or about $4,000 over a year ago.

“It mainly reflects the fact that home prices have risen,” said Chen Zhao, an economist at Redfin.

In addition to high home prices, other issues faced by home buyers include high inflation, volatile mortgage rates and limited savings balances.

A typical home buyer down payment amounted to around 16.3% of the December purchase price, with a median home selling price of $428,000 per Redfin data.

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Home buyers are putting more cash on hand to buy from home, but the decline continues to be a major hurdle.

A new Bankrate report found that 81% of buyers say down payments and closing costs are obstacles to owning a home someday. In 52%, the hurdles are “very important”, but in 29% it is “somewhat important.”

A survey conducted by YouGov PLC told 2,703 US adults in the middle of January.

Federal agencies such as the Fair Housing Association, the Bureau of Veterans Affairs and the US Department of Agriculture have low-wage and unpaid mortgage options.

The Department of Veterans Affairs offers a VA loan program, with only 0% of people qualifying. The USDA Department of Agriculture mortgage, known as the USDA loan, aims to help buyers buy rural homes and also offer a 0% down payment option.

Federal Housing Administration loans, or FHA loans, can reduce by just 3.5% for eligible borrowers, including first-time buyers, low- and middle-income buyers in minority groups, and buyers.

More people have recently used government-sponsored mortgage options. Approximately 15% of mortgaged home sales used FHA loans in December, up from about 10% in mid-2022, Redfin found. The share of those who used VA loans increased from 6.2% the previous year to 6.7%.

The increase could be a sign that buyers have an advantage in the market, according to Zhao of Redfin. Sellers usually prefer to avoid FHA loans as they can involve longer processing times, she said. For this reason, buying with an FHA loan is not particularly advantageous in the highly competitive housing market.

A low-down payment mortgage can help someone achieve homeownership, but it can cost you additional costs.

With less prepaid cash, you need to borrow more and make your monthly mortgage payments much higher, experts say. It also could result in a higher mortgage rate.

“Best-price loans will have a bigger down payment, so the less you put them down, the higher the rate, the higher the risk,” said Melissa Kohn, regional vice president of William Ravis Mortgage.

If your down payment is less than 20%, you may be eligible for personal mortgage insurance or PMI. This is added to your monthly mortgage payments.

Meanwhile, mortgage lenders tend to either put more cash up front or offer better loan terms to borrowers who make 20% payments. Benefits include lower interest rates, lower fees and favorable repayment terms. A 20% down payment can be difficult, but certainly not a requirement. You can buy much less houses in advance. What should you know about this?

Mortgage reports show that PMI costs between 0.5% and 1.5% of the annual loan amount, depending on factors such as credit score and total down payment. For example, a $300,000 loan could cost a mortgage premium from $1,500 to $4,500 a year, or between $125 and $375 a month.

“You don’t get anything for free,” Korn said.

In a Bankrate survey, respondents said they expected it would take years to pay the down payment.

But “time isn’t necessarily a nemesis,” said Mark Hamrick, senior industry analyst at Bankrate. “It’s very integral to have more time.”

The time it takes to save can work in your favor. When building down payment savings, you can also work on debt repayments and credit improvements. This will also help you improve your mortgage approval chances at the best available rates.

While building your down payment, look for other programs that will help you get there faster.

Aside from federally-supported low-down payment mortgage options, we will consider a state or local support down payment assistance program that can provide assistance to qualified people, experts say. Such programs can provide grants and loans to cover some or all of the down payment and closure costs for home buyers according to the mortgage report.

“The good news is that the federal government is not the only game in town,” Hamrick said. “It’s really about recognizing and trying to take advantage of potential application programs.”

Browse online through state agencies to see if you qualify for a state or local assistance program or grant, Cohn said.

“For people who don’t have the luxury or have not been able to save enough, it’s a good option,” she said.