- High home prices and interest rates have put homeownership out of reach for many Americans.
- But some have managed to find the money for a down payment and buy a home.
The housing market is unaffordable for many Americans right now, thanks to elevated home prices and interest rates, which makes the prospect of shelling out for a down payment even more daunting for prospective buyers.
For first-time homebuyers, a down payment of 20% or more can reduce monthly mortgage costs and help buyers avoid private mortgage insurance. But given the US's elevated housing costs, this isn't realistic for many Americans. It's why some have signed on to mortgages with lower down payment requirements — as low as 0% — even though these agreements come with some risks.
The median down payment for first-time US home buyers is roughly 8%, according to the National Association of Realtors's annual profile of home buyers, which surveyed over 6,800 Americans who purchased a home between July 2022 and June 2023. That marked the highest typical downpayment since 1997, when it was 9%. Eight percent of the median home sale in October, per Redfin, would translate to a down payment of about $33,000.
Why has the typical down payment for first-time buyers reached an over two-decade high when the housing market is so expensive? In part, it's because wealthier first-time buyers — who can more easily afford a higher down payment — have been particularly active in the housing market. In 2023, the typical first-time homebuyer had a household income of $96,000, up from $71,000 in 2022.
"In a still-competitive housing market, more well-off home buyers were able to have their bids accepted by offering larger down payments and even by paying cash," Jessica Lautz, NAR deputy chief economist and vice president of research, said in a release accompanying the report.
First-time homebuyers use savings, gifts, and financial assets to fund their down payments
First-time homebuyers are using savings and other financial assets to get closer to meeting their down payment goals. However, it's not always enough to get to the finish line.
Last year, the share of first-time homebuyers reached 26%, the lowest level since the survey began in 1981. While this figure rose to 32% this year, it remained well below the average of 38% since the survey began in 1981.
Compared to repeat homebuyers — who can often use proceeds from existing home sales to fund a down payment — first-time buyers are more likely to use savings, gifts, and the sale of financial securities to fund their down payments.
Seventy-one percent of first-time buyers cited savings as one of the ways they financed their downpayment, compared to 46% of repeat buyers, according to the NAR report.
But buyers also relied on various other sources for additional funding. Nineteen percent used a gift from a relative or friend, compared to 4% of repeat buyers, while 11% sold stocks or bonds. Nine percent drew from — or took out a loan from — their 401(k) or pension fund, 4% used their inheritance, and 2% used proceeds from cryptocurrency sales.
While mortgages with lower down payments could make it easier for more Americans to cobble together the funds to buy a home, experts say it's important for borrowers to ensure they can afford their monthly payments. Low or nonexistent down payments, for instance, were among the factors that contributed to the 2008 home foreclosure crisis.