When house prices rise, the down payments required to purchase those houses also increase. So it’s no surprise that in today’s extreme sellers market, median down payments have hit all-time highs. Here’s why: Nationwide home prices jumped 10.4% in February compared to the same period in 2020.
States that have seen a sharp increase in appreciation like Idaho, which saw a 22.6% increase in home prices, could hurt first-time homebuyers who now face down payment requirements. much larger funds.
Find out where your state stands in terms of the down payment amount and the percentage of a home’s selling price that buyers are willing to spend on the down payment.
States with the highest median down payment
The top 10 states (including the District of Columbia) with the highest median down payments are mostly concentrated in the West. Still, there are a few outlying states in the Northeast and two that are not in the continental United States in the top 10.
California and Hawaii are tied for first place, with median down payments reaching six digits.
States with the lowest median down payment
Fortunately for some, the entry price for home ownership is not equivalent to that of a Ferrari. Twenty-three states have median down payments of $ 30,000 or less, while 10 states can boast of having even more affordable median down payments of $ 20,000 or less.
The states with the lowest down payments are found primarily in the South and Midwest. West Virginia leads the low downpayment pack, with a median down payment of just $ 11,000, followed by Oklahoma ($ 14,000) and Louisiana ($ 15,000).
Homebuyers lower more of the price of the home
Fortunately, there are no hard and fast rules for how much homebuyers must pay up front. FHA loans, for example, still offer a 3.5% down payment option for eligible borrowers, while VA loans have $ 0 down payment options. Many lenders, various government sponsored programs, and private organizations offer their own low down payment loans and grants to qualified borrowers.
However, despite the poor down payment options, buyers are lowering more of the purchase price today than they have in recent years. In 2019, the average down payment was 12%, whereas today homebuyers are putting more than 16% less, says George Ratiu, senior economist at Realtor.com. This increase is still not enough for many borrowers to avoid having to pay for mortgage insurance, which will make your monthly payments more expensive.
While there’s no definitive reason why people lower themselves further, Ratiu says the competitive buying landscape plays a decisive role.
“It’s very recent that buyers put about 16% down. I think it’s because of the extremely hot market, ”says Ratiu. “If you have a few pre-approved buyers, the one with the largest down payment is usually considered the one with the strongest bid. They’ve invested more, so buyers think their deals will be more likely to close than someone with a lower down payment. “
Residents of expensive states tend to spend a larger percentage of the purchase price on the down payment. The two most expensive down payment states, Hawaii and California, also claim the top two spots for the highest percentage, 20.3% and 19.7%, respectively.
But even states with relatively low down payments exceed the down payment level by 16%. For example, in Wisconsin and Tennessee, where the median down payment is about $ 25,000 and $ 26,000, respectively, buyers pay 16% of the purchase price.
The top 10 states where people spit out the smallest percentage of the purchase price are everywhere except the West. From Georgia to Vermont to Ohio, these states represent the lowest down payment as a percentage of the purchase price, which can be especially useful for first-time home buyers.
West Virginia gets the Blue Ribbon with just 12.2% decline, followed closely by Louisiana (12.4%), Oklahoma (13.2%), Alabama (13.3%) and Michigan (13.6%).
How do today’s homebuyers finance down payments?
Most of the experts Forbes Advisor spoke to said the two main sources of funding for down payments were monetary gifts from family and friends, and a buyer’s 401 (k) loan. A distant third was savings.
“Shake up the family tree,” says Tim Ross, CEO of Ross Mortgage Corporation, headquartered in Troy, Michigan. “A gift from a family member that doesn’t require a refund is a common way for a potential buyer to make a down payment. “
A 2019 survey by the National Association of Realtors survey showed that 32% of first-time home buyers and 8% of repeat buyers received a monetary gift from friends and family. For homebuyers who don’t have the benefit of the family tree, their 401 (k) might be the best and only option.
Before touching on your retirement savings, however, it would be wise to consult a financial advisor about your current financial situation and your retirement and even career goals.
Remember, once you dip into your 401 (k), you can’t get that money back, so you are borrowing for your future. This makes the home buying process all the more serious: you want to make sure that the home you are buying is a smart investment worth tapping into your savings.
Two ways to withdraw money from your 401 (K) for your down payment
The rules for 401 (k) plans differ by employer, so be sure to check your employer’s specific rules to discover your best options.
In general, there are two ways to leverage your 401 (k) savings:
- Withdraw funds directly
- Borrow on your 401 (k)
Withdraw funds directly
If you withdraw money from your 401 (k) before the age of 59 and a half, you will incur penalties and you will have to pay income taxes on the amount you withdraw, unless your financial needs are met. fall under the rule of “withdrawal in case of difficulty”. In this case, you will not pay any penalties, but you will still owe income tax. Many 401 (k) plans consider withdrawing money for a down payment from the house as a hardship withdrawal. If you are not eligible for a hardship withdrawal, you will need to pay a 10% penalty, according to IRS rules.
Since the money you withdraw is considered income, you could move to a higher income bracket, which can impact your taxes. Again, it is important to speak with a financial advisor or accountant about the possibility of withdrawing money from your 401 (k) and what it means for your taxes.
Borrow on your 401 (k)
Taking out a loan against your 401 (k) might be a better option than just withdrawing the money. For one thing, you won’t have to pay early withdrawal penalties or income taxes. However, you will have to repay the borrowed amount. The good news is that the interest you pay on your 401 (k) loan is coming back to you.
The length of the loan depends on your provider. Borrowers who use the money to buy a home typically have more than five years to pay off the loan.
If you don’t pay back the loan within the allotted time, the status will change from loan to withdrawal meaning you will have to pay income taxes and early withdrawal fees.
Use piggyback loans to make a down payment
Another way people finance today’s huge down payments is with a second mortgage, often referred to as a “piggyback loan”. Usually these second mortgages are home equity loans that have higher and adjustable rates.
“Depending on your individual financial scenario, a second mortgage may be a viable alternative to fund your down payment,” says Kevin Quinn, senior vice president of personal loans at First Internet Bank. “By increasing the amount of your down payment, you may be able to avoid mortgage insurance, resulting in a lower monthly mortgage payment. “
These are typically designed for people who have less than 20% down payment and want to avoid mortgage insurance (which kicks in if you put less than 20% down).
Typically, to qualify for a piggyback loan you will need to put in 10% of funds, the primary mortgage will cover 80% of the purchase price and the piggyback loan will cover the remaining 10%.