Study: How do most first-time buyers get a downpayment?
WASHINGTON – May 8, 2019 – Freddie Mac's May Insight examines the perceptions prospective homebuyers have around down payments, the funding sources they use, and how families and others assist them.
In addition to the common misbelief that lenders require a 20 percent downpayment on a mortgage, borrowers often mistakenly believe that a downpayment can only come from savings, says Sam Khater, Chief Economist at Freddie Mac.
While borrowers most often use savings for their downpayment, they also frequently use assistance from government or nonprofit organizations, gift money from friends and family, and seller contribution or proceeds from a previous home sale.
An analysis of the National Survey of Mortgage Originations (NSMO) found that 70 percent of homebuyers used savings, inheritance, other assets or retirement monies for a downpayment in 2016 – down from 79 percent in 2013. The analysis also shows that 31 percent of homebuyers used proceeds from the sale of another property over the four-year period, up eight percentage points from 23 percent, and homebuyers who used assistance or a loan from a nonprofit or government agency doubled from 5 to 10 percent.
According to Khater, Freddie Mac believes that demand for downpayment assistance of all types will increase in the coming years as more millennials look to become homeowners.
Nearly 25 percent of borrowers turn to the Bank of Mom and Dad to help with a downpayment. Moreover, family members are providing support by co-signing for a mortgage or listing themselves as a co-borrower, especially among first-time homebuyers.
Based on an analysis of Freddie Macs portfolio of purchase loans during last year, 3.2 percent of first-time homebuyers listed a family member who was 55 years or older as a co-borrower. In high cost markets like San Jose, California, 7.2 percent of first-time homebuyers listed a family member who was 55 years or older as a co-borrower.
In 2016, 61 percent of respondents used downpayment sources other than savings or help from friends and family. Of the 61 percent, 10 percent used assistance or a loan from a nonprofit or government agency.
The findings suggest a real opportunity for the mortgage industry to educate borrowers about low-downpayment products and sources of downpayment assistance beyond personal savings, says Khater. Doing so may help more first-time homebuyers realize the dream of homeownership sooner.
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