As home prices rise and tight inventory continues, the current market has made it more challenging for American’s to reach their goals of homeownership, especially for low-to-median-income borrowers and first-time homebuyers.
According to the Urban Institute’s Housing Finance Policy Center, there are three significant barriers to homeownership: saving for a down payment, accessing mortgage credit, and housing affordability.
In a recent report, Urban Institute breaks down these barriers, reporting data on the latest market trends of these obstacles.
One of the biggest barriers are consumers thinking they need to put more down than lenders actually require. According to the report, results show that 53 percent of renters cite saving for a down payment as an obstacle to homeownership.
Meanwhile, 80 percent of consumers are unaware of how much lenders require for a down payment or believe all lenders require a down payment above 5 percent. Additionally, 15 percent assume that lenders require a 20 percent down payment, and 30 percent believe lenders expect a 20 percent down payment.
Contrary to popular belief, borrowers are not putting down 20 percent. The report notes that the national median loan-to-value (LTV) ratio is 93 percent. With entities such as the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) offering lower down payment options than the GSEs, from 0 to 3.5 percent.
Although the challenging path to homeownership isn’t based on downpayment alone—credit access is historically tight, especially in during the post-crisis period. Currently, the media credit score of a new purchase mortgage origination is 779, compared with pre-crisis media of 692.
National home price affordability has declined due to the growing home price appreciation, and for a mortgage with 20 percent down, mortgage payments would make up 22 percent of the median borrower’s income.
According to Urban Institute, if interest rates reach 4.75 percent, national affordability will return to historical average affordability.
To view the full report, click here.