Housing is the largest expense for your average American according to a 2016 U.S. Department of Labor consumer expenditures report, with 30% to 38% of all income going towards it. And millennials are experiencing this cost firsthand, as they now represent the largest group of homebuyers today (35%), outpacing both Boomers (31%) and Gen X (26%) according to new National Association of Realtors data.
And the biggest expense for potential home buyers? The down payment. It’s also the biggest challenge for millennial home buyers, with 46% of millennial renters saying they would purchase a home if that had enough money saved for it.
Of the 3,000 U.S. consumers polled for a 2017 Ellie Mae survey, 53% of the millennials responded to the question “What’s stopping you from buying a home?” with “I haven’t said enough for a down payment.” But there’s a problem: millennials have been misled.
Saving is a good thing. But saving up so much for a down payment is both unnecessary and likely the single most expensive money mistake a millennial could make.
“When you put money down on a house, you convert your money from a liquid asset, like cash or stock, to an illiquid one: home equity. Liquid assets can be accessed when emergencies happen” said Dan Green, CEO of millennial finance site Growella. “Illiquid assets cannot, especially home equity.”
The argument is that if you don’t have between 10% to 20% saved up, you can’t afford a home. That argument is flawed due to the simple fact that lenders don’t foreclose due to a down payment or lack thereof, they foreclose on a home if payments have been missed for three months straight. Therefore, having access to liquid assets like cash—cash you’re told to burn through as a downpayment upfront—are more important after the home purchase, not before.
“Having access to cash is the surest way keep from losing your house. The size of your down payment has nothing to do with your ability to make payments. In fact, it can be argued that the larger your down payment, the less you’re able to handle a financial crisis” said Green.
Access to cash you won’t have if you make a large down payment. When millennials shop for a house, they’re often misled into thinking this is the only way. It isn’t.
From down payment assistance programs to using a no down payment mortgage, there are dozens of ways to avoid wasting such a large sum of money (options I wish I knew about back when I bought my first home!) Some low-to-no down payment options millennials should look into include: a USDA mortgage, VA loans for active duty service members, MD and Ph.D. loans and more.
On the low down payment end, where often just a 3% down payment is required, HomeReady and Home Possible loans should be looked into. Also, if you think you’ll have to suffer through a larger monthly payment just because of your lower down payment, think again. For all of the above programs, your monthly mortgage rate won’t increase just because you’ve made a smaller down payment.
More Info: www.forbes.com