The pandemic has led to unprecedented demand for homes — and unprecedented prices, too. The National Association of Realtors reports that the median price of existing single-family homes hit $356,600 in May, up more than 24% from May 2020.
"Real estate is in the perfect storm," says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors. "Supply is down, and interest rates are at a record low."
That's bad news for anyone saving up for a down payment. Putting the traditional 20% down on the median home will cost you $71,320, compared to $56,700 just a year ago. But while putting together a larger down payment is more challenging, it may still be possible. Here's what you need to know.
You may not need to put down the traditional 20% on a home. Depending on the type of loan you have, you could pay a smaller amount. Military veterans and their spouses can take out a VA loan, which doesn't require a down payment as long as the sales price isn't higher than the home's appraised value.
The same goes for the U.S. Department of Agriculture's loan program, which is targeted at rural buyers.
Many city and state housing authorities have down-payment assistance programs to help first-time homebuyers, which could help push the amount you pay below 20%. For example, New Jersey residents could receive a loan of up to $10,000, while people in Colorado may be eligible for grants worth up to 3% of the mortgage.
There are some federally backed mortgage programs that could help, too. A Federal Housing Administration loan, targeted at low-income borrowers, asks for just 3.5% down. Some employers offer down-payment assistance as well.
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Even if you're not eligible for any of these programs, there are some traditional lenders that may be willing to let you put less money down. The drawback, however, is that you'll need to buy private mortgage insurance, since the lender is taking on additional risk. PMI could cost 0.5% to 1% of your mortgage each year, and depending on interest rates, the total cost of your loan may rise.
Ultimately, PMI is designed to protect the lender, not the borrower, if the borrower falls behind on payments. It's not a one-size-fits-all solution, and you'll need to weigh the risks carefully.
With many homes going into bidding wars, buyers need to consider another important factor: If a home appraises for less than you've offered to pay, you typically need to make up the difference in cash. More than half of homes, 51%, sold above their listing price in May, up from 26% last year, says Redfin.
So you could end up needing even more money on top of the down payment.
That's why it's important to have your finances in order and a strategy in place before heading into a bid, says Compass real estate agent Jared Barnett. If you bid over asking, agents will often request proof that you have the extra money.
"In this competitive real estate market, you may be up against multiple bids, and owners do not select their buyer solely on price," he says. "They consider who is financially prepared and can show the source of funds for the down payment, as well as a preapproval letter from their bank."
If you don't have documents prepared showing that you can cover the extra cash, you could lose the home to someone who made a lower offer.
"I was recently representing a listing that received multiple bids," Barnett says. "We ended up accepting an offer of $5,000 less than the highest bidder, because the offer we accepted had all of their paperwork in order. [The buyers] came across as more professional and easier to deal with during the transaction, which added value to the sellers."
With mortgage rates starting to go up and Zillow predicting that the national median home value could rise another 15% within the next year, many buyers are rushing into decisions right now. A striking 89% of the homes sold in May were on the market for less than a month, according to the NAR. Properties typically remained unsold for just 17 days, versus 26 days last year.
The pressure to buy now, even though costs and down payments are so high, may seem overwhelming. Still, experts caution against draining your retirement savings or emergency fund to buy a home more quickly, as that will likely put you in a bind later on if you fall into financial hardship or need to make expensive repairs.
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If you can afford to wait or have no choice but to keep saving, that could benefit you in the long run. "Once the current demand runs its course, don't be surprised if real estate prices level off or decline for a number of years," says La Spisa.
Consistent saving and careful budgeting can help a lot, too. "Work with a group of like-minded friends or someone to hold you accountable to your goals," says Karen Kostiw, a real estate agent at Warburg Realty. "Knowing your liabilities and assets, including your monthly inflows and outflows, enables you to clearly have a financial picture of your current state. This enables you to plan and build your [savings] for the down payment."
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