Potential homeowners may face several barriers when trying to buy a home, such as down payments, credit availability, and affordability. A paper from the Urban Institute titled “Barriers to Accessing Homeownership” discusses these challenges, and notes the alternatives and options available to buyers.
One issue that Urban Institute notes is the misconceptions about down payments. According to the study, many consumers believe they need to put more down on a down payment than is actually required, while 53 percent of renters cite saving for a down payment as an obstacle to homeownership. Urban found that 80 percent of consumers either are unaware of how much lenders require for a down payment or believe all lenders require a down payment above five percent. Fifteen percent of potential buyers believe lenders require a 20 percent down payment, and 30 percent believe lenders expect a 20 percent down payment.
According to Urban Institute, borrowers are not actually putting down 20 percent. The national median loan-to-value ratio is 93 percent, while the Federal Housing Administration and the U.S. Department of Veterans Affairs may offer eve lower down payment options than the GSEs, from 0 to 3.5 percent.
For those that struggle with down payments, Urban Institute notes that there are 2,144 active down payment assistance programs in the country,
Another barrier, credit access, may not be as big a barrier to homeownership as consumers believe. While credit access is tight by historical standards, Urban Institute notes that he median credit score of new purchase mortgage originations has increased considerably in the post crisis period. The median credit score for purchase mortgages is 779, compared with the pre-crisis median of 692.
Despite these misunderstood barriers, affordability has proven to be a real problem. According to Urban Institute, national home price affordability has declined in the past five years. However, improving interest rates may boost affordability, and if interest rates reach 4.75 percent, national affordability will return to historical average affordability. Urban Institute also notes that owning a home is still cheaper than renting, though this varies by state and area.
Find the full report here.