While many policy makers tout the importance of homeownership for the evident economic and social benefits it brings, many are reluctant to support down payment assistance programs (DPA). Instead, they suggest that a new borrower should save up for their down payment before making application to purchase a home. However, according to an Urban Institute study*, 80% of renters think they need a sizable portion of the purchase price as a downpayment, with many being unaware that they probably qualify for some form down payment assistance.
While on the surface it may appear prudent for a borrower to save up for a down payment, this article explains how the borrower is potentially financially worse off by having to wait years to save a down payment. The following are headwind factors for renters and Millennials:
1. Increasing rents - making savings difficult
2. Student loan debt - payments preventing savings
3. Increasing home prices - making homeownership more difficult each month.
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Most renters, who do not have a family able to provide a down payment gift to them, are finding it exceptionally difficult to save up the funds needed to purchase a home, and are stuck renting year after year, as rents and real estate prices increase and grow further out of reach. Minorities are hit particularly hard with homeownership rates hovering in the low 40s, while their white counterparts enjoy homeownership rates in the mid 70s.
Given these factors, prudent social and regulatory policy should encourage down payment assistance in order to allow a renter to get on the escalator of wealth creation through equity gains in the real estate they purchase.
Take a hypothetical example of a couple just out of college, earning $70,000 per year between them and saddled with an average $80,000 in student loan debt.** After taxes, they bring home $4,500 per month. Their monthly rent payment is $1,500, having increased by $100 since last year. They have student loans which are now due, which amount to $700 per month. After health insurance, transportation expenses, food, they are left with a few hundred dollars per month in disposable income. They have a goal to set aside $300 per month to save up for a down payment.
*https://www.urban.org/sites/default/files/publication/94801/barriers_to_accessing_homeownership_1.pdf
**Average student loan data provided by Mark Kantrowitz with Private Student Loans Guru
With the average starter home in their area selling for $300,000, they need to save up a minimum of $10,500 just for the down payment, which at a rate of $300 per month savings, will take them 3 years to save up, hoping their apartment rent does not go up too much.
There are a large variety of down payment assistance programs available, offered by States, municipalities, and some national programs, such as Chenoa Fund (chenoafund.org). There are a wide variety down payment assistance options, but generally speaking they fall into one of three categories.
1. True grants for down payment - which have no effect upon the interest rate of the 1st mortgage loan. These are fairly rare.
2. Forgiven down payment assistance, coupled with interest rates generally .75% higher on the 1st mortgage loan
3. Repayable down payment assistance, in the form of a 2nd mortgage, coupled with a normal rate 1st mortgage loan.
The following chart is an analysis of the financial situation of someone who receives DPA options 2 or 3 above, and buys now, compared to saving for a down payment for 3 years. The chart assumes a 5% home price increase per year and a tax rate between state and federal tax of 20%, on a home price of $300,000 today. The scenario assumes interest rates will not increase, which is a risk for renters waiting to buy.
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The analysis demonstrates the wisdom of buying now rather than waiting years to purchase a home. While lenders and policy makers should avoid inordinate risks to the mortgage market, renters should be informed of down payment assistance options which provide the opportunity to buy a home now and begin building equity for their futures.