You’ve been working hard for years, trying to sock away a little bit each month so you can buy a place to call your own. You’ve probably noticed that this consistent saving has become more of a squeeze in the last several years with an increase in rent prices. Rents are at an all-time high, making it more and more difficult to put away money for a down payment on a house. It feels like a no-win situation a lot of the time.
In addition to higher rents, the cost of homes has risen exponentially. Take for example, Denver, Colorado. According to an April 2015 article in the Denver Post, the area saw a 9.8% increase in home prices between February of 2014 and February of 2015. This was the highest increase of anywhere in the country, including New York City. When you take a number like this into consideration, you’re looking at having to save even more to reach the “golden” 20% threshold for a down payment that will typically allow you to avoid buying expensive mortgage insurance.
You may recall that in times past, it was commonplace for people saving for a house to take on a second job, stashing away the additional wages to reach their 20% quickly. Unfortunately, since the recession, jobs are fewer and farther between, and people are having to spend more time at their main job just to ensure that they hold onto their position.
It’s possible you have found yourself (or a few you may know) in the uncomfortable position of moving home after college, not through laziness or a lack of motivation, but purely for financial reasons. It is now a common trend to see college graduates moving back in with their parents and working for a few years so that they can pay down their college debts. According to PNC Mortgage regional manager Staci Titsworth, most people that have gone this route are working upwards of 50 or 60 hours a week just to make ends meet.
In addition, she states that there are more dual-income households and first-time buyers in the market. Most of these couples and families end up waiting a great deal of time in an effort to save enough to purchase a home where they can expect to live for five years or more. Contrast this to the late 1990’s, when mortgages were handed out like candy and almost anyone with a job was eligible. In many cases, people choose not to wait, coming in below the 20% down payment mark. This necessitates mortgage insurance, but this is assuming you can get a mortgage.
Even with the added expense of mortgage insurance, monthly house payments still tend to be less expensive than rent. On average, homeowners spend about 15% of their net monthly income on house payments (sans mortgage insurance) for median-valued homes, as opposed to the 30% renters send out every month. This can be a major money saver in the long run, but the task of coming up with the down payment can be an upward climb.
It’s not uncommon to find that those looking and buying in the more expensive real estate market tend to go with lower down payments. For instance, an editor at a Salt Lake news center went this route. She and her husband bought a townhome priced at $299,500 in Bountiful, Utah, putting 5% down.
Over the next decade they managed to save the full 20% they would need to purchase a single-family house in Davis County, all the while upgrading the townhome’s kitchen, bathrooms and roof. Although they had to tap into savings for the improvements, they saw a great return on their investment and were able to replenish their savings AND make the down payment on their new home.
You may hate to ask, but rest assured that getting help from you parents when trying to buy a new home isn’t all that uncommon. This is evidenced by the increase in loans from family and friends during the recession – it rose 13%, from a mere 8% up to 21%. On a high note, the economy may be making a recovery, as these types of loans and gifts dropped by 13% last year, taking it back to the starting point. For more information on family gifting limits.
Another avenue you can explore is creating a strict budget that will allow you to accrue your down payment consistently. Set up an automatic deposit for a set amount from your paycheck into a savings account (most employers will offer split deposits). You won’t ever see this money in your checking account, making it less tempting to blow it on something you may not really need.
According to Sean Grzebin, the head of retail mortgage lending for JP Morgan Chase, they have seen an increase in first-time buyers leveraging their 401(k) plans and implementing more careful spending. Most 401(k) plans don’t incur enormous penalties, and you may find that it would be worth the extra bit of cash to avoid mortgage insurance. You also stand a better chance of getting approved for a loan if you can bring at least 20% to the table. It tends to be a show of commitment and responsibility on your part.
If none of these options seem “realistic” for your current situation, “Seller or Owner Financing” may be one of your last choices. In some ways it may be the best choice. Whenever mortgages become harder to qualify for, seller financing becomes more popular. Whether the seller has their home paid off or not, they could decide to play the bank. Seller’s might do this ranging from desperation to sell or to fulfill their retirement income goals. Either way it’s an additional option that can be structured in so many different ways. I’ve personally invested in multiple “seller financing” homes. Let me know if I can help clarify any confusion on the topic.
Contact me for a “goldmine” of helpful information that will allow you to make the right decision for your future as a home owner.