First-time homebuyers often claim coming up with the down payment is the main obstacle to buying a home. However, one study shows it is the additional non-mortgage debt that many borrowers bring to the table that is the bigger obstacle to homeownership.
Real estate data firm RealtyTrac recently analyzed affordability in more than 500 counties nationwide, looking at the impact of lowering the down payment for conventional loans (those that can be sold to Fannie Mae and Freddie Mac) from the traditional 20 percent to as low as 3 percent, as suggested recently by Federal Housing Finance Agency (FHFA) director Mel Watt as a way to "increase access for creditworthy but lower-wealth borrowers." Findings from the study show while lower down payments may help pave a quicker path to homeownership for some prospective homebuyers, the additional non-mortgage debt that many borrowers carry is a bigger drag on homeownership.
Relating the study's findings, Daren Blomquist, vice president at RealtyTrac, said, "For borrowers without additional debt, monthly house payments are affordable in more than 90 percent of U.S. housing markets — whether they make a 20 percent or 3 percent down payment. But for borrowers with the additional debt burden of student loans and car payments, monthly house payments are affordable in less than half of U.S. housing markets with a 3 percent down payment."
According to the study, lower down payments will alleviate one major hurdle to homeownership, but the "affordability sweet spot" comes for borrowers with no additional debt. Across all markets analyzed, it would take an average of 12 and a half years to save up for a 20 percent down payment at the current annual savings rate of 5.6 percent reported by the St. Louis Federal Reserve. It would take an average of less than two years to save up for a 3 percent down payment across all markets analyzed.
In high-cost areas like Silicon Valley, housing affordability is a challenge. According to the study, in Santa Clara County, where the estimated median household income is $93,006, using the September 2014 median sales price of a single-family home of $709,250, and a 20 percent down payment, it would take a typical borrower 27 years to save for a 20 percent down payment; 13.6 years to save for a 10 percent down payment; and 4.1 years to save for a 3 percent down payment. In order to afford monthly payments with a 20 percent down payment, and with no car loan or student loan, a borrower would need to earn a minimum household income of $100,360; and $122,462, if the borrower carried an average new car loan and student loan.
There is a bright spot to the report, and that is down payment assistance programs are a resource many buyers don't utilize. There are more than 2,300 down payment and closing cost programs available across the country, with an estimated 60 to 80 percent of homes in most areas qualifying for one of these programs, according to data collected by Down Payment Resource. The average dollar amount available from down payment assistance programs is $19,720 nationwide, but can be between $50,000 and $100,000 in higher-cost areas.
"It's true that even in Santa Clara County, where many prospective borrowers feel homeownership is unaffordable, it pays to check into down payment programs," said David Tonna, president of the Silicon Valley Association of REALTORS®. "In California there are over 200 unique programs, 162 housing agencies and a number of occupation-based incentives for borrowers. Many consumers aren't aware that these programs exist."
Tonna encourages consumers to visit http://mortgage.car.org. "The California Association of REALTORS® has created a powerful search tool, the Down Payment Resource Directory, that will identify available mortgage finance programs in your target area," said Tonna.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
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