A few years ago, a young couple in their late 20s, with steady jobs, would have been ideal candidates for buying their first home. Now, they’re stuck in a cycle of rising rents and can’t save enough for a downpayment. Their situation is becoming increasingly common. With interest rates going up and home prices skyrocketing, buying a home feels like an impossible dream, especially for low- to middle-income families and minority borrowers.
A recent report from Redfin paints a stark picture of just how dire the situation has become, highlighting the urgent need for change. According to an analysis of county records covering 40 of the largest U.S. metro areas, the typical downpayment on a single-family home rose from 15% in June 2023 to a shocking 18.6% a year later, the highest level in over a decade.
Additionally, nearly three in five homebuyers made a downpayment of more than 10% of the purchase price, one of the highest shares on record. A decline in the use of loans insured by the Federal Housing Administration (FHA), as noted in the Redfin report, is equally alarming.
FHA loans have long been a lifeline for first-time and low- to moderate-income buyers because of their lower downpayment and modest credit requirements. According to the report, however, FHA loans made up just 13.7% of all U.S. home purchases in June, the lowest level in nearly two years. It’s clear that many would-be FHA borrowers are getting squeezed out of the market by the growing number of all-cash buyers, who now represent over 30% of home purchases.
Downpayment burden
The growing downpayment burden is pushing the dream of homeowner- ship further out of reach, especially for first-generation buyers who don’t have a lot of money saved up. Many such buyers also lack access to generational wealth or family assistance and are simply unable to stockpile cash fast enough to keep pace with rising costs.
The result is that a larger portion of the market is effectively being locked out of homeownership — an issue that becomes more acute considering that home prices will likely continue to rise as interest rates fall, which many market observers believe will happen. For mortgage professionals, though, the Redfin report should be a wake-up call.
Originators play a crucial role in guiding clients through today’s complex market. Creative solutions are essential to help more buyers enter the housing arena. Two tools stand out for assisting first-time homeowners: one time-tested, the other fresh. These resources will prove invaluable in overcoming obstacles to homeownership, especially in challenging times. Leveraging these tools, originators can unlock new possibilities for aspiring buyers.
Crucial lifeline
Downpayment assistance (DPA) programs have long been a crucial lifeline for first-time homebuyers. These initiatives bridge the savings gap, enabling creditworthy borrowers to buy homes. Particularly effective in aiding minority borrowers and those from disadvantaged areas, these programs offer an alternative to “the bank of mom and dad” — a resource often unavailable in lower-income and minority communities.
For decades, these programs have successfully paved the way to homeownership for many who would otherwise struggle to enter the housing market. Most downpayment assistance programs cover some or all downpayment costs and are designed to work with both FHA and conforming loans. Some come with forgivable second loan options, which can make the ability to afford and sustain homeownership even easier. In today’s market, access to this kind of support is more important than ever.
Downpayment assistance programs remain underutilized, despite their potential. Yet a fresh alternative has emerged, aiding new homeowners. This innovative approach offers renewed hope for those entering the property market, bridging gaps where traditional methods fall short.
Shared appreciation
Over the past several years, shared appreciation programs have become a unique way for first-time buyers to access homeownership without having to drain their savings to overcome the downpayment hurdle. Shared appreciation programs work by providing buyers with downpayment funds in exchange for a share of the home’s appreciation when it is sold or refinanced.
Rather than paying for the entire downpayment on their own, the borrowers receive financial support upfront and don’t have to pay it back until they sell or after a predetermined length of time. For buyers who struggle with saving for a downpayment, this arrangement can make homeownership more accessible without adding significant debt.
Shared appreciation can be especially beneficial for families who have historically been excluded from homeownership opportunities. For people of color and others who may not have access to generational wealth, shared appreciation can widen the path to homeownership significantly. Rather than penny-pinching their way to a downpayment — a process that can take years — they can enter the market now and start building home equity immediately.
Life transforming
Ultimately, both downpayment assistance and non-traditional financing programs like shared appreciation programs can help families unlock the most powerful benefit of homeownership. By building wealth through home equity, Americans are able to provide themselves and their children a financial future that might have otherwise been impossible. Homeownership, as all know, is literally life transforming.
But as downpayment burdens and the cost of homeownership continue to rise, mortgage professionals would be wise to have a game plan for leveraging both tools when working with first-time homebuyer clients. Because the next client could very likely need it.
Author
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Miki Adams is the president of CBC Mortgage Agency, a nationally chartered housing finance agency and a leading source of downpayment assistance for first-time homebuyers. She joined the Cedar City, Utah-based company in November 2016 as executive vice president and was promoted to president in January 2021. She has 30 years of mortgage lending experience and has managed companies through calm and tumultuous markets. Her background includes credit and collateral underwriting, secondary marketing and portfolio asset management, regulatory compliance, and regulatory audit and examination management.