Millennials find down payments the biggest barrier to home ownership

PhotoMillennials, like other generations before them, typically want to buy a home and plan to do so, according to a study by personal finance site NerdWallet.

Even though millennials as a group are thought to be burdened by crushing student loan debt, the study found a greater percentage of them plan to purchase a home than gen X and baby boomer consumers.

The biggest obstacle millennials face is saving for a down payment, but the study suggests a lack of information about down payments and the mortgage process may also be holding them back.

“The study shows that there’s a good deal of disagreement about how much you need to save for a down payment,” said Tim Manni, a mortgage expert at NerdWallet.

Manni says the confusion is understandable, considering how many loan options there are. While the traditional down payment is 20 percent of the purchase price, first-time buyers usually put down much less.

Down payment options

There are conventional loan products that require only 10 percent, five percent, or even as little as three percent down. The government-backed FHA program requires only a 3.5 percent down payment.

However, the less money a buyer puts down, the higher the monthly payment will be, so affordability becomes a greater factor. If a buyer is purchasing a home for $200,000, he or she would need a $40,000 down payment to put 20 percent down. If you put less than 20 percent down, you are also required to pay a monthly mortgage insurance premium, adding to the monthly cost.

With an FHA loan on the same house, the buyer would only need to come up with $7,000 as a down payment. However, the monthly payment for that loan would be significantly higher than with a 20 percent down payment.

Qualifying for a mortgage with a smaller down payment will require a good credit score and a good income. Where you live and work will likely make that easier or harder.

Geography matters

Another personal finance site – HowMuch.net – has ranked cities by how many hours you would need to work just to pay the mortgage each month. In cities like Los Angeles, Miami, and San Francisco, homeowners need to work more than 100 hours to make enough money just to pay for monthly housing costs.

That’s more than half the month, meaning more than half of monthly income would go to housing. The editors say it’s no surprise that the most expensive places are located on the East and West Coasts.

On the other hand, the easiest places to earn the income to pay for housing are found in the Midwest and South, especially in older manufacturing cities. Housing costs can be earned in just 16 hours in Toledo and 17 hours in Memphis.

Because of the geographic factors, millennials determined to buy a home may be more willing to relocate than previous generations. The NerdWallet study also finds they are more willing to make sacrifices, such as postponing weddings and children in order to save up money.

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