7 Ways Millennials Save Up for their First Down Payments
According to a recent survey, about 98% of Americans would like to own their home. However, for millennials, the combination of stagnating wages, student loan debt, and an ultra-competitive real estate market has made saving up for a down payment all but impossible. With median prices for homes around $231,000, a 10% down payment would be $23,100, which is already an unsettling figure for a cash-strapped generation. If one lives in a very competitive real estate market like the Bay Area, where median prices are around $893,000 and 20% down payments are virtually required, you can see why many millennials feel home ownership is out of reach.
Though millennials are driving the real estate market, as a group they are less likely to be homeowners as previous generations were at the same age. And certain inequalities have become amplified in the last ten years: those who have more family support and avoided student debt were able to become homeowners sooner and then make other investments, further increasing their wealth. Those who were occupied with student loans and underemployment after the 2008 recession have had little opportunity to save or buy real estate.
When you have people for whom home ownership is still important, but lack cash to make down payments, it becomes essential to find “creative” solutions. However, these solutions aren’t prudent from a future financial perspective.
How are millennials getting money for their down payments?
- Using their personal savings: Most millennials (around 65% of those who bought a home in the past five years) used their personal savings to make a down payment.
- Relying on their partner’s savings: Once some millennials get married or otherwise committed, they use part of or sometimes all of their partner’s savings in order to make the down payment.
- Appealing to family for financial help: For some, family members proved invaluable to making the down payment. About 14% of millennials who bought homes in the last five years used family contributions, whether it be loans or cash gifts, to make down payments. While they’re not asked for, in 12% of cases, inheritances are often used as part of a down payment.
The above solutions are not unusual. The following solutions are where millennials deviate from previous trends.
- Dipping into retirement savings: In a survey of adults between 21 and 34, one in three took money from or took loans against their retirement accounts in order to finance a down payment. (Retirement accounts include 401(k)s and IRAs.) What’s more worrying, one in five plan to do the same thing in the future. Financial experts generally advise against this practice because it sacrifices one’s future security in order to pay for a home that may or may not appreciate. While it seems to make sense to make a bigger down payment in order to lower one’s mortgage rate, using one’s retirement funds is a sure sign that this person is not financially “fit” enough for home ownership in the first place, and it might only take one costly emergency to cause a series of missed mortgage payments.
- Crowdfunding: With the popularity of sites like Kickstarter, it was only a matter of time before someone harnessed crowdfunding to raise money for other purposes. HomeFundMe, a product of CMG Financial, is a crowdfunding site specifically for down payments. This is basically the same as receiving a monetary gift or loan from family, but these contributions come in conjunction with a home loan from a bank or mortgage lender. A small circle of family and friends can give cash gifts, which must be heavily scrutinized and verified. Most users raise about $2,500 to go towards their down payments. Of course, the catch is that the mortgage loans must be with CMG Financial, so this limits a home buyer’s ability to shop for more affordable mortgage rates or loan fees. But a solution like this might work for someone who would get turned down for a conventional loan elsewhere.
- Working a second job or side hustle: Thanks to freelancing sites like Upwork and sharing economy stalwarts like Uber, it’s easier for people to earn extra money in addition to their normal jobs. Nearly 36% of millennials are earning money for a down payment with a side hustle in their spare time.
- Making sacrifices and delaying life milestones: At the same time as saving for a down payment by saving larger portions of their paychecks, millennials are finding other ways to economize. Even if they can afford it, they are delaying having kids and eschewing large weddings in order to save. Some are also downsizing their apartments in order to save on rent.
All of this is done because the majority of millennials believe that they must put down a 20% down payment. However, a little research into first-time homebuyer programs shows that “20%” isn’t necessarily the magic number:
- The U.S. Department of Housing and Urban Development offers search resources for FHA foreclosures and HUD homes, with down payments of 3.5% possible.
- Additionally, FHA (Federal Housing Authority) loans are an option for those with not-so-great credit, with higher rates on their mortgages and down payments of 3.5% to 10%, depending on credit rating.
- For law enforcement, EMTs, teachers, and firefighters, their Good Neighbor Next Door Program offers 50% off list prices on certain properties.
- VA Home loans offer lower down payment options and grants for veterans.
- USDA loans, which require no down payment, are for those who are looking for homes in rural areas and who meet certain conditions.
With a little thought and a lot of hard work, home ownership and eventually building wealth is within reach for millennials – without resorting to questionable financial moves that could seriously impact their futures.
Are you in the market for a new home? Contact us today.