Homebuyers are struggling to make bigger down payments

Home prices have been rising, and so have down payments.

The median down payment among homebuyers in December was $63,188, according to a recent report by Redfin. That’s up 7.5%, or about $4,000, from a year prior.

“That is mostly reflecting the fact that home prices have increased,” said Chen Zhao, an economist at Redfin.

On top of high home prices, other issues homebuyers face include high inflation, volatile mortgage rates and limited savings balances.

The typical homebuyer down payment was equal to about 16.3% of the purchase price in December, when the median home-sale price was $428,000, per Redfin data. 

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While homebuyers are putting down more cash for their home purchases, down payments continue to be a major hurdle.

A new report by Bankrate found that 81% of would-be buyers say that down payment and closing costs are obstacles toward owning a home some day. For 52%, the hurdle is “very significant” while for 29% it’s “somewhat significant.”

The survey conducted by YouGov Plc polled 2,703 U.S. adults in mid January.

There are low- and no-down-payment mortgage options across federal agencies like the Fair Housing Association, the Department of Veteran Affairs and U.S. Department of Agriculture.

The Department of Veterans Affairs offers VA loan programs, and those who qualify can put down as little as 0%. Mortgages from the U.S. Department of Agriculture, referred to as USDA loans, aim to help buyers purchase homes in rural areas and also offer 0% down payment options.

Federal Housing Administration loans, or FHA loans, can require as little as 3.5% down for qualifying borrowers, which include first-time buyers, low- and moderate-income buyers and buyers from minority groups.

Recently, more people are using mortgage options sponsored by the government. About 15% of mortgaged home sales used an FHA loan in December, up from mid-2022’s decade-low of roughly 10%, Redfin found. The share of those who used a VA loan rose to 6.7%, from 6.2% a year earlier.

The increase could be a sign of buyers having an upper hand in the market, said Redfin’s Zhao. Typically, sellers prefer to avoid FHA loans because they can involve a longer processing time, she said. For this reason, buying with an FHA loan can be less advantageous in a highly competitive housing market.

While low-down payment mortgages can help someone achieve homeownership, there may be additional costs involved.

With less cash upfront, you will need to borrow more, making your monthly mortgage payment much higher, experts say. And you could also face higher mortgage rates.

“The best priced loans are going to do a larger down payment, so the less you put down, the higher the rate is, the greater the risk,” said Melissa Cohn, regional vice president at William Raveis Mortgage.

With a down payment of less than 20%, you may be subject to private mortgage insurance, or PMI, which is added to the monthly mortgage payment.  

Meanwhile, mortgage lenders tend to offer better loan terms to borrowers who put more cash up front, or make 20% down payments. Benefits can include lower interest rates, reduced fees and favorable repayment terms. While a 20% down payment can be daunting, it’s certainly not a requirement. You can buy a house with much less up front. Here’s what to know.

PMI can cost anywhere from 0.5% to 1.5% of the loan amount per year, depending on factors such as your credit score and your total down payment, according to The Mortgage Reports. For example, on a loan for $300,000, mortgage insurance premiums could cost from $1,500 to $4,500 a year, or $125 to $375 a month, the site found.

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

In Bankrate’s survey, respondents said they expect that coming up with a down payment will take years.

But “time isn’t necessarily a nemesis,” said Mark Hamrick, senior industry analyst at Bankrate. “Having more time is quite virtuous.”

The time it takes to save can work in your favor. As you build your down payment savings, you can also work on paying down debt and improving your credit, so that you improve your chance of being approved for a mortgage at the best-available rate, Hamrick said.

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

Aside from federally backed low-down-payment mortgage options, consider state or local assistance down payment assistance programs, which can offer aid to those who qualify, experts say. Such programs can offer grants and loans to help cover part or all of a homebuyer’s down payment and closing costs, per The Mortgage Reports.

“The good news is the federal government isn’t the only game in town,” Hamrick said. “It’s really about trying to be aware and take advantage of any potential applicable program.”

Browse online through the state agency and see if you meet the qualifications for any assistance programs or grants available in your state or area, Cohn said.

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