Are Down Payments Keeping People From Becoming Homeowners?

• 38.5% of non-homeowners said that the down payment or closing costs were keeping them from purchasing a home.
• 31.8% of future buyers plan to make a down payment between 6% – 10%, while 26.6% plan to make a down payment between 11% – 20%.
• 65.4% of prospective buyers plan to use a savings account to fund their down payments, while a third plan to use down payment assistance and 16.9% plan to utilize cryptocurrency.

Owning a home can be an incredibly rewarding and worthwhile experience, but it’s no secret that it comes with a high cost of entry: the down payment.

For many would-be homeowners, the down payment remains a significant barrier to homeownership, while current owners are typically motivated by other concerns when it comes to buying again, and enjoy more maneuverability in the market thanks to the equity they have in their homes.

To understand how much current and future homeowners are putting down on their homes and what their barriers to buying are, Rocket Homes℠ recently surveyed just over 3,000 people. Here’s what was found.

What Are The Most Common Barriers to Homeownership?

The 31.6% of Americans who don’t currently own a home largely said that the things keeping them from purchasing a home were finance related.

When asked to choose all the factors that were keeping them from purchasing a home, 38.5% of non-homeowners said “down payment or closing costs,” 36.9% said “credit history or credit score” and 31.7% said they “can’t afford the cost of homeownership.”

The 68.4% of Americans who are current homeowners differed quite a bit in what was holding them back from buying a new home. Of current homeowners, 32.3% said that they both “don’t want to move” and are simply “not interested at this time,” while 21.2% listed the “current market conditions” as a factor that was keeping them from purchasing a home.

It makes sense that the third most important factor keeping this group from purchasing was the current housing market; with the frenzy the market has been in for the past couple of years, many current owners are in a good spot to sit and wait for things to cool down a bit, all while enjoying a faster than usual rate of appreciation.

Because current homeowners have previously overcome the down payment and credit barriers to homeownership, and likely have some equity built up, this group is more driven by their desire to stay in their current home – only 14% of current homeowners said that the down payment or closing costs was keeping them from purchasing a home, and even fewer listed credit history or an inability to afford the cost of homeownership as factors (12.8% and 6.2%, respectively).

What Costs Do Buyers Find Most Surprising?

Though down payments can be a barrier to homeownership, it’s a cost that most buyers seem to be aware of and aren’t generally surprised by. So, which costs do they find most surprising?

Of the 74.6% who have experience with the mortgage process, most (58.6%) said that the cost of buying a home or homeownership did not surprise them. The remaining respondents (41.4%) said they were most surprised by the closing costs (59%) and taxes or insurance (56%).

Closing costs are often overlooked by new buyers who are unfamiliar with the home buying process, who may be especially caught off guard by the fact that they can equal 2% – 5% of the loan amount: that’s $5,000 – $12,500 on a $250,000 loan.

The cost of a down payment was surprising to some folks, but less so than these other factors, with 37.9% of respondents listing the down payment as a cost that surprised them.

How Much Do Buyers Plan To Put Down?

How much are prospective buyers actually planning to put down? Of those who are in the process of getting a mortgage or plan to get a mortgage in the future (a group that made up 36.2% of total respondents), 31.8% plan to put down 6% – 10%.

26.6% plan to make even larger down payments, between 11% – 20%, while 22.4% plan to make a down payment between 1% – 5%.

For reference, a 20% down payment on a $322,692 house (the median sales price in December 2021, according to Rocket Homes data) is nearly $65,000. By comparison, conventional loan borrowers can potentially qualify with a down payment as low as 3%, or just under $10,000.

As median prices have reached historic highs in recent years, home shoppers with smaller budgets have a natural advantage when it comes to their down payments. For example, of the 47.3% who said they’re in the process of saving for, looking for or buying a home, a quarter reported that their home buying budget was between $100,000 – $199,999. In this range, a 3% down payment would equal between $3,000 – $6,000. For first-time home buyers worried about their down payments, limiting their searches to properties in this starter home range can make getting their foot in the door a little easier.

How Do Buyers Plan To Fund Their Down Payments?

65.4% of those who are in the process of saving for, looking for or buying a home plan to use their savings to fund their down payments, while a third plan to utilize down payment assistance.

Other methods of sourcing a down payment include cashing in on investments, using gift money from family or even tapping into owned cryptocurrency, a method that tends to be more popular with younger generations; 23% of millennials and Gen Z-ers plan to use cryptocurrency to fund their down payments.

While buyers can’t directly use cryptocurrency to fund their down payments, they can use cash from the sale of their crypto, though the specifics of how they can do this may vary from lender to lender.

When it comes to utilizing equity in their homes to fund a down payment, current homeowners are well-positioned. The 54.9% who said they’re aware of how much equity they have in their homes estimate that they have a median of $82,000 in equity. First-time homeowners say they have a median of $70,000, while current owners who have owned other homes in the past estimate they currently have $100,000 in equity.

How Can First-Time Home Buyers Overcome The Down Payment Barrier?

The good news for those looking to break into homeownership is that there are quite a few options that can help cash-strapped buyers afford their down payments, from low down payment loan options to down payment assistance that comes in the form of loans or grants.

USDA loans offer mortgages with no down payment for those in rural areas, while qualifying veterans and servicemembers can get a VA loan with 0% down. Those who can’t get one of these loans may qualify for a 3% down conventional loan or a 3.5% down FHA loan. The U.S. Department of Housing and Urban Development website can also help buyers find home buying assistance programs in their state.

Though it can sometimes be difficult depending on their local housing market, buyers can also make their down payment more manageable by being flexible in what they’re looking for and limiting their home search to smaller, starter homes or condos. Of those who have had a mortgage or are in the process of getting a mortgage, 52.1% said they borrowed as much as they qualified for. But those who don’t max out their home buying budgets enjoy lower down payments and more wiggle room in their monthly housing budgets. Ultimately, it’s about finding a balance between what they can comfortably afford, what they qualify for and what the housing market offers in their area.

Methodology

To learn about current and future homeowners’ thoughts, feelings and plans surrounding homeownership and down payments, Rocket Homes surveyed 3,177 individuals across the U.S. The sample was controlled so that a third of the respondents were between the ages of 23 – 40, another third were between 41 – 56 and the final third were 57 – 62. Any respondent who said they “haven’t gotten a mortgage before and don’t plan on getting a mortgage ever” was screened out. This survey was conducted in January 2022.