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51% of millennials say this is the biggest reason they can't buy a home right now

"Younger generations today are less financially comfortable than previous generations."

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Matt Welter via Twenty20

Buying a home is a lifelong dream for many Americans — but the traditional 20% down payment is the biggest barrier standing in their way. More than half of millennials in a new poll said saving up for that initial deposit is the No. 1 reason they haven't closed a deal yet.

Researchers at real estate website Clever surveyed 1,000 adults in January to compare millennials' current savings with the ideal amount they want to put down for a new home.

"Saving for a down payment is usually the biggest impediment for first-time homebuyers," says real estate agent Steven Gottlieb of Warburg Realty. "It is well documented that younger generations today are less financially comfortable than previous generations."

At the same time, "housing costs have also grown out of proportion compared with decades ago," he says, "so the cost to rent a basic home eats up a higher ratio of monthly income than it ever did. With higher living costs, it's tougher to save money each month."

Young people are saving more but still can't afford a down payment

Young people in the Clever survey report having more money stashed away: Almost two-thirds, 57%, had at least $10,000 in savings, up 36% from 2020. And just 11% said they had less than $1,000 set aside, down from 26% who said the same last year.

Still, rising home prices mean those savings don't add up to much of a down payment.

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In a survey of 7,000 prospective homebuyers nationwide in October, Point2 researchers found nine in 10 respondents between the ages of 25 and 40 reported having "significantly less" in savings than the average national down payment amount of $62,600. Median home prices in the United States now are about $269,000, according to Zillow. That means 20% down would be about $53,800.

Given the economic environment, it's also likely people have earmarked some of those savings for their emergency fund or another goal — and may not be ready to wipe out that balance.

You don't have to put 20% down on a home

Buying a home can be an especially a big lift considering millennials are mostly trying to pay for it without raiding a 401(k) or getting help from someone they know. According to Clever, 67% want the down payment to come from their own personal savings. That was compared to about a quarter, 24%, who plan to pull from a retirement or other investing account, and 16% each who said they plan to take a loan, or a gift, from a family member or friend.

It's notable that millennials find saving for a down payment daunting, considering that two-thirds are expecting to put down far less than the traditional 20%. In fact, many expect to pay less than 5% upfront.

While a 20% down payment is considered the gold standard since lenders use that money to mitigate risk in case the borrower defaults, many banks and financial institutions allow consumers to pay a smaller initial amount. The median down payment was 6.6% in the third quarter of 2020, according to ATTOM Data Solutions.

Saving for a down payment is usually the biggest impediment for first-time homebuyers.
Steven Gottlieb
Warburg Realty

Certain types of federally backed mortgages require as little as 3.5% down upfront, and in select instances prospective homebuyers can put nothing down at all.

The state you live in could also offer financial aid. First-time buyers in New Jersey, for example, could qualify for a loan of up to $10,000 to cover the down payment and other closing costs. Meanwhile, in Colorado, residents can be eligible for grants worth up to 3% of the mortgage.

Save money steadily and know what aid you qualify for

Another big concern among would-be homeowners is that their existing debt will make it harder to buy a home or manage the expenses of homeownership. According to Clever, 32% of would-be buyers think they have too much debt to qualify for a mortgage.

Student loan debt is also a big hurdle for first-time homebuyers, points out Melissa Cohn, executive mortgage banker at William Raveis Mortgage. Last year marked the first time that outstanding balances in the United States collectively surpassed $1.7 trillion.

Banks factor in your monthly debt obligations when figuring out how much they are willing to lend for a home purchase. And "while most student loans are currently in forbearance due to Covid, banks will always use the minimum payment or 1% of the loan amount when qualifying for a mortgage," she says. "If possible, the borrower should get their payments reduced with an income-based plan or by refinancing."

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Aim to stash away a bit of money at a time in your home pursuit, experts say. Keep those savings in an account earmarked specifically for that purchase. "Save a portion of every paycheck. Consider saving first before prepaying student loans" while the payment freeze is in effect, says broker Michael J. Franco of Compass. "Once a homeowner builds equity in a home, they can refinance or take a home equity loan to pay off student loan debt."

Working to improve your credit score can also put you in a better position to land a home. Although some loans accept "poor" scores as low as 500, the baseline needed for most is 620. And to get the best interest rate on a mortgage loan, borrowers should have a credit score of 760 or greater.

Almost 9 million Americans have relocated since the start of the pandemic, according to the National Association of Realtors. If you're in the market to move, there's no reason you can't join them as long as you make a plan.

"Every buyer should get preapproved for financing before they go house hunting," says Cohn. "That way they will know exactly what they qualify for, whether they need to fix their credit, negotiate a student loan payment, or get a guarantor."

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