Saving for a down payment is the biggest hurdle to homeownership, and the size of that down payment sets the stage for the entire home shopping experience. It can make the difference between a monthly mortgage payment that's affordable and one that stretches a household's budget too thin.
The 2018 Zillow Group Consumer Housing Trends Report analyzed home buyers nationally and in five major metro areas – Atlanta, Chicago, Washington, D.C., Phoenix and San Francisco – and their decisions about their down payments, including how much they put down and where they got the money. The survey revealed that just as U.S. housing markets vary greatly by region, as do down payment trends.
A down payment of 20 percent of a home's purchase price is a longstanding benchmark, to keep monthly payments lower, save on interest and avoid paying for costly mortgage insurance. Forty-three percent of buyers nationally put down 20 percent or more, the survey data show. Atlanta and Phoenix had the smallest share of buyers -- at just over 30 percent -- putting that much down. Buyers in Phoenix were just as likely to put down 5 percent or less as they were to put down 20 percent or more. Even more concerning are buyers in Atlanta, who put down less than 5 percent more often than they put down at least 20, which opens them up to greater risk of becoming underwater on their mortgages. Buyers in Chicago, San Francisco and Washington, D.C., however, are at least as likely as the typical national buyer to put down at least 20 percent.
Zillow research has shown it takes more than seven years for a typical American home buyer to save a 20 percent down payment on the typical-valued home. In some markets it's much higher; San Francisco, for example, pencils out to more than 18 years to save the $193,440 needed. Still, more than half of buyers there put down 20 percent or more. So how do they manage that significant barrier to home ownership?
The Consumer Housing Trends Report shows that savings still account for the largest chunk, with 70 percent of buyers nationwide saying savings made up at least some portion of their down payment. Second (39 percent) was proceeds from a previous home sale, which typically accounted for about 20 percent of the total down payment. What does that mean for first-time buyers who don't have that equity nest egg? Fifty-one percent said their down payment included a gift and/or loan from family or friends.
For millennial buyers – the largest group of buyers and the most likely to use multiple funding sources for their down payment –about half used a gift or loan from family or friends for at least a portion of their down payment, accounting for about one-fifth of the down payment on average. Other responses included investments and retirement funds.
"Saving up for a down payment can be tough and requires good budgeting and long-term planning, especially when for many of us the cost of rent and everyday life outpaces what we're able to put in the bank. Even if you don't have plans to buy a home in the next year or two, it never hurts to start setting aside savings for a future home purchase," said Zillow senior economist Aaron Terrazas.