Younger people are facing a problem, with rising home pricing meaning that the down payment requirement is getting higher, and many are unable to afford it.
The National Association of Realtors says the median home price in the U.S. is now $350,000, which means the average buyer would need to pay $70,000 as a deposit on their purchase to avoid private mortgage insurance.
Of course there are low down payment loans available to buyers who cannot meet the 20% down threshold. The FHA for example requires just 3.5% down on its loans, but that still translates to $12,500 for a median priced home.
“Higher home prices mean higher down payments, and first-time buyers may suddenly realize it is a challenge unless they can tap into financial help from family members,” Lawrence Yun, the NAR’s chief economist, told Forbes.
In addition, lenders are demanding to see higher credit ratings from prospective home buyers as their default risks from existing homeowners grow due to the COVID-19 pandemic. The median FICO score required to qualify for a mortgage is around 700, according to July data from the Urban Institute. But in pricier markets, the median FICO score rises, to 777 in San Francisco for example.
There are still ways around this. Those who didn’t have a high enough credit rating can turn to nonbank lenders instead, such as Quicken or LoanDepot. For these lenders, the median FICO score required is usually less than banks, but the interest on the loan will inevitably be higher to cover the added risk.
As such, some young buyers who are now working remotely and are no longer required to turn up at the office, the temptation to move away from expensive urban centers to smaller communities where homes are cheaper, may increase.
“Rural areas have mortgages that don’t require down payments,” Yun told Forbes. “And some workers who can work from home may want to consider outer suburbs or small towns where USDA home loans are available and where homes are very affordable.”