The Dread of the Down Payment

Row homes in the District of Columbia

This post is an excerpt from Delta’s Third Quarter 2018 Washington Area Housing Outlook.

One of the biggest barriers to homeownership, especially among younger buyers, is the unaffordability of down payments. A study done by Apartment List explains that in larger metro areas, millennials will need to wait at least a decade in order to save up for a 20% down payment. Even worse, in more expensive metro areas like San Jose, a millennial wouldn’t be able to afford a down payment on a condo until the year 2041. With affordable starter homes essentially non-existent in many parts of the country, the homeownership rate for millennials is remaining stagnant. If millennials want to purchase homes, they must migrate to affordable areas or take on higher levels of debt.

Brian Roberts from Forbes argues that millennials are being misled when they are told that they need 10%-20% saved up in order to afford a home. He explains that “when you put money down on a house, you convert your money from a liquid asset, like cash or stock, to an illiquid one: home equity.” Since liquid assets can be accessed in case of emergencies, it may not be smart to put all of your funds into a down payment. If you don’t have access to cash, you are more at risk of losing your home in a financial crisis. Mortgage assistance programs may be able to help millennials purchase a home without making an excessive down payment.

A study done by Bank of the West sees a worrisome trend occurring—29% of millennial homeowners used money from an IRA or 401(k) loan or withdrawal to make their down payment.  Financial Planner Kristin Sullivan warns that “for millennials, the 401(k) is going to be the major component of their retirement. It is a sacred pact with your older self to take care of that older self”.

Alternatives to dipping into retirement savings do exist for those wanting to purchase a home. Cutting out some unnecessary expenses can help save money each month. Smart money moves help create a good handle on finances before making the jump into homeownership. Additionally, scaling down on desires when it comes to a potential home can help to reduce not only the down payment, but the monthly mortgage costs as well. This allows for more time to save up before making any wanted changes to the home in the future. Lastly, an interesting new idea being used is crowdfunding down payments. HomeFundMe, run by CMG Financial, gives a way to crowdfund down payment costs from family and friends. Concepts like these may be able to help millennials combat the high cost of entry into homeownership.