Saving for years or putting less down?
The answer to the choice rests partially on what market you live in. Nationwide, renters must save on average for 6.5 years for the 20 percent down payment, which is the norm when buying a home. The median home in the U.S. costs $216,000; a 20% deposit would therefore be $43,200. If the renter saves the amount that financial experts recommend each month (20%), we arrive at approximately 6.5 years.
In many parts of Florida, however, including Miami, Orlando, and Tampa, renters need considerably more time to save that 20% down payment. In Miami, for example, its 11 years and 5 months, in Orlando it’s 8 years, 2 months. Those extra years of renting do not allow for equity building that comes with home ownership. The percent of income spent on housing in these cities ranges from 50.1% in Miami, to 38.8% in Tampa, with Orlando in the middle.
In the nation’s most expensive housing markets (such as San Jose and San Diego, California), it can take an unbelievable 22 years to save the 20 percent, using the same baselines.
However, it would only take 2 years in Miami to save for a 3.5% down payment which is offered to some homebuyers by the Federal Housing Administration (FHA). In Orlando the 3.5 percent savings would only take 1 year and 6 months, and in Tampa it would be 1 year and 3 months. The differences are mostly determined by the median annual income of the residents of each city, and the median home prices.
According to Joshua Clark, economist at HotPads, a map-based rentals and real estate marketplace: “Home prices are outpacing incomes in many of the country’s largest markets, which makes saving for a home more difficult. On top of that, the current generation of first time buyers are dealing with unprecedented levels of student debt, making a down payment a major factor keeping young renters out of the housing market…sustained increases in home values and rents suggest that lower down payments may become more popular as first -buyers continue to be pinched on both sides of the market.”
The FHA, as referenced earlier, is the government agency charged with helping qualified homebuyers – especially first-time buyers get approved for a home purchase. The agency does this by assisting mortgage lenders in making loans by guaranteeing a portion of the balance. Should you decide to purchase with a lower down payment, FHA loan rates are among the lowest available anywhere.
There are other options (government programs), as well. Fannie Mae and Freddie Mac, the quasi-government sponsored companies, that drive the residential mortgage credit market offer 3% down payments on home loans. Veterans Administration and U.S. Department of Agriculture loans don’t require a down payment, at all.
But the buyer must be aware that there is still a price for these reduced down payment programs, in terms of mortgage insurance or a funding fee. The insurance is paid monthly. The fee is paid upfront but can be financed as part of the loan amount or through a higher interest rate.
It is up to each buyer (in consultation with his financial advisor) to determine whether a reduced down payment loan is the right decision.
In 2017, 29% of first-time buyers put down between 3 and 9 percent on their home purchase.