Many Entry-Level Buyers Lean on Mom and Dad for Downpayment

Friday, December 30, 2016 by Zelman & Associates

Filed under: affordability entry-level millennials mortgage

Earlier this year, we surveyed a nationally-representative sample of consumers (~3,000) about their demographic, housing and financial circumstances. One area of focus was the perception of mortgage credit availability among renters or those living with their parents.

According to our survey, 54% of 25-34 year olds that are renters or living at home do not believe that they could qualify for a mortgage. While this improved substantially from 66% in 2014 when we asked the same question, we believe it is still higher than the reality of who could actually qualify, with the disconnect related to properly understanding actual underwriting requirements.

One particular area of misinformation revolves around downpayment criteria, as 33% of these 25-34 year olds that do not believe they could qualify cite a lack of savings as the primary reason, easily ahead of lack of income (21%), poor credit (16%) and too much debt (12%). And yet only 10% correctly understand that mortgages can be secured with 5% down or less through the Federal Housing Administration (FHA) or conventional lenders’ low downpayment programs.

While a negative narrative is spun by many related to these young adults and their finances, it is also important to recognize that a sizeable share receive funds from their parents or other downpayment assistance programs to help them bridge the savings gap. For example, thus far in 2016, the downpayment for 33% of homebuyers using FHA financing was provided by a relative (27%), a local government program (4%) or a non-profit organization (1%). This share has increased each year since averaging 25% in 2012.

Looking further at the 20 largest metropolitan areas, downpayment assistance was common across the board, ranging from 28% in Tampa to 48% in Denver, and largely aligned with relative affordability measures. Interestingly, government downpayment assistance programs are substantial in Denver, Las Vegas and Phoenix where they have funded the downpayment for 20%, 18% and 17% of FHA homebuyers thus far in 2016.

Depending on one’s social views, the merits of downpayment assistance can be debated, but most important to our housing market analysis is an understanding that the vast wealth of the baby boomers is likely to remain a solution for the foreseeable future for many entry-level homebuyers that can safely afford the carry costs of a monthly mortgage payment but lack the savings for a downpayment.

Many Entry-Level Buyers Lean on Mom and Dad for Downpayment

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