Home buyers today face tough challenges—housing prices have soared, a dollar doesn’t go as far as it once did and rent is more expensive than the past. How are people today making such a large purchase in spite of these hurdles? With more flexibility and a bit of creativity when it comes to financing, today’s buyers are finding ways to achieve homeownership.
Know Your Options (And Credit Score)
To even begin the home buying process, it’s important to know what resources are available. Turns out, according to a 2017 Fannie Mae working paper, “How Much Do U.S. Households Know About Qualifying for a Mortgage?”, many Americans don’t have a strong, or even basic, understanding of what it takes—financially—to buy a home, nor if they meet the criteria.
The first step to knowing if you can afford a home is figuring out what financing options are available to you, including and especially what mortgages you’re eligible for and, subsequently, how much you need/can afford to put down upfront. Not only did Fannie Mae discover that most consumers don’t know the minimum FICO score required by lenders, the survey also found that only 49 percent of consumers don’t even know what their credit score is.
Consumers also aren’t sure how much they even have to put down on a home. About 40 percent are unsure of the lender required minimum down payment. Plus, three-quarters of consumers don’t know about programs set in place to help with down payment troubles like FHA loans. Before consumers even start thinking about saving for a home, they should know what their financial resources are and, as a baseline, if they’re currently eligible to buy.
Make Enough Money to Be Able to Save
With fewer resources to pull from than their older, wealthier counterparts, renters wanting to be buyers face tough financial headwinds. According to the Zillow Group Consumer Housing Trends Report 2017, renter households typically earn a median income of $37,500 annually, which is $50,000 less than the median household income netted by households who recently bought a home (of whom the median household income is $87,500 annually). While there are ways to enter into homeownership without making $87,500 in household income, it’s hard to afford to buy if you make significantly less. “If you’re making $37,500 per year, it’s probably not feasible for you to buy in almost any market,” says Zillow Chief Economist Dr. Svenja Gudell.
Only 29 percent of Americans do make $87,500 or more, per U.S. Census Bureau, American Community Survey 2016 data. For perspective, only one of the top 10 most common jobs in the United States carries a salary above $37,500, meaning the jobs that the majority of Americans hold—fast food workers, cashiers, retail salespersons, customer service representatives, secretaries, housekeepers among others—bring in less money than the median renter household. While households purchasing homes are more likely to have two incomes than renter households (and thus a higher median household income combined), even two-income households struggle to afford to buy in competitive markets.
Save Up Enough Cash (But Not As Much As You Think)
One of the most daunting parts of homebuying? The down payment. In fact, two-thirds of renters cite saving for a down payment as the biggest hurdle to buying a home, according to the Zillow Housing Aspirations Report. Per findings from the Zillow Group Consumer Housing Trends Report 2017, almost one-third (29 percent) of buyers active in the market express difficulty saving for the down payment.
For people buying the national median home valued at $201,900, with the traditional 20 percent down payment, that’s $40,380 up front—just to move in.
“The down payment remains a hurdle for a lot of people,” says Gudell. “Although, they should know they don’t have to put 20 percent down.” Although putting down less than 20 percent means additional considerations, such as the cost for private mortgage insurance (PMI), some find it worth the hassle. In fact, only one-quarter of buyers (24 percent) put 20 percent down, and just over half of buyers (55 percent) put less than the traditional 20 percent down.
Buyers are also getting creative about piecing together a down payment from multiple sources. According to the report findings, nearly 1 in 4 buyers (24 percent) build a down payment from two or more sources, including saving, gifts, loans, the sale of a previous home, stocks, retirement funds and other resources.
Know Your Deal Breakers, But Be Flexible
In order to get into a home—even if it’s not the home of their dreams—some of today’s buyers are considering homes and locations outside of their initial wish list, and are having to get increasingly flexible when it comes to neighborhood, house condition, and even type of home.
Although single-family homes remain a dream for most home seekers, buyers today consider and buy condos and townhouses—in order to secure a home in their ideal location. Buyers with household incomes under $50,000 are more likely to consider homes outside of the traditional single-family residence (40 percent), compared to those with incomes of $50,000 or above (24 percent). “I do think people get discouraged when they look in their target neighborhood and they see homes around $170,000 when they’re looking for a $110,000 home,” Gudell says.
Affordably-priced homes do, in fact, exist. But in popular areas, where people most often want to live, it’s going to be harder to find that cheaper home, Gudell says. “If you’re willing to take a longer commute and make a couple tradeoffs, you might be able to find a home that is further out that might be cheaper,” Gudell explains. “You have to leave the paved path before you can find cheaper choices.”