River Valley region homebuyers are now facing their second consecutive year of inventory shortages. And as happens when demand overwhelms supply, prices increase. It’s the perfect storm to keep first-time buyers from achieving the American dream. But it’s also the perfect formula for motivating creative ways to save for a down payment.
In a recent Bankrate survey, almost half of millennials (ages 23 to 38) said the cost of living was keeping them from buying a home. But they’re not the only ones struggling in today’s market. Two in five Gen Xers (ages 39 to 54) and a third of baby boomers (ages 55 to 73) said the same thing. So how are they getting those down payments together?
Ways to save for house down payment
The Bankrate survey explored how first time home-buyers are putting together down payments needed to buy a home. What it found was buyers combine several means for coming up with the money, including everything taking on another job and selling personal items to moving in with family and friends to save. The most popular ways to gather a sufficient down payment include good, old fashioned saving, homebuyer assistance programs, gifts from family and friends and, for millennials, using a portion of their retirement savings.
Saving money for a down payment
For the majority of home buyers, across generations, traditional saving methods were key, with around half of all home buyers reporting they actively saved toward their down payment.
Homebuyer assistance programs
First-time homebuyer assistance also played an important part with 33% of millennial buyers and 27% of Gen X buyers tapping into the resource.
Gifts from family and friends
Gifts from family or friends also played a role for all generations. A third of millennials used gifts, and a quarter of Gen Xers used them. Even baby boomers, whom we might think of more as gift-givers than recipients, used them at a rate of 14%.
Of concern, about one in eight millennials took the risky (and potentially costly) step of dipping into retirement savings to come up with the down payment. While there are many ways to do so — from cashing out a portion to borrowing against it — this may cost you penalties, additional taxes and a notable decrease in the balance when it’s time to retire.
Biggest roadblock to saving a down payment may be a misconception
Despite all presented above, one finding from the survey suggests that perhaps the biggest barrier of all is ignorance. Half of all U.S. adults didn’t know the minimum down payment required to buy a home. Those who guessed at it (about 28%) said down payments must equal 20% of the purchase price or more. Saving $40,000 for a down payment on a $200,000 would indeed be daunting.
It’s a good thing they’re wrong. The actual standard minimum is 0 to 5%, bringing that down payment down to $10,000. That knowledge just may be the perfect antidote to today’s perfect storm.