A new survey from Bankrate shows that millennials have a harder time coming up with enough money to make a down payment and cover closing costs on a new home and take longer to do so than older homebuyers.
Forty-five percent of prospective millennial homebuyers said cost of living was a chief impediment to affording a down payment and closing costs, compared with 38% of Gen Xers and 31% of baby boomers.
Millennials were also disproportionately burdened by student loan debt when looking to buy a home, the survey found.
Financially constrained though they may be, millennials appear more resourceful than older homebuyers in funding their down payment and closing costs on a first home. Fifty-three percent of millennials reported that they had saved money specifically for a down payment, compared with 47% of Gen Xers and 45% of boomers.
Thirty-three percent had received a financial gift — not a loan — from family or friends, versus 23% of Gen Xers and 14% of boomers, and 33% had used a first-time homebuyer grant or loan assistance, versus 27% of Gen Xers and 15% of boomers.
Here are other funding sources buyers used for their first down payment:
- Moved in with family/friends to cut costs: millennials 14%, Gen X 5%, boomers 2%
- Tapped retirement savings: millennials 13%, Gen X 8%, boomers 7%
- Sold personal items: millennials 12%, Gen X 5%, boomers 2%
- Got additional source of income: millennials 11%, Gen X 9%, boomers 5%
- Received loan from family/friends: millennials 6%, Gen X 4%,; boomers 6%
“It’s good to see millennials taking advantage of homebuyer grants and loan assistance programs, but their desperation becomes obvious when you see them forced to sell off personal items and tap into retirement savings at twice the rate their parents had to,” Bankrate mortgage analyst Deborah Kearns said in a statement.
“Tapping into retirement savings is a risky move that can put your future at risk. You might be better off looking into down payment assistance programs, special low down-payment loan programs or buying a less expensive home to keep your costs more affordable.”
Bankrate commissioned YouGov to conduct an online survey among 2,582 adults between July 31 and Aug. 2.
The survey found that older generations were typically able to save enough for a down payment on their first home faster than millennial homebuyers.
Of those who were able to save in less than 10 years, boomers took an average of two years and six months, while Gen Xers took three months longer and millennials needed three years. Gen Xers in the survey were likeliest to say it took them more than 10 years to save for their down payment.
A recent report indicated that many Gen Xers are unable to save as much as they would like for retirement because of crushing debt and other financial obligations.
The Bankrate survey found that respondents who were still looking to buy a home feared it would now take them longer to save for a down payment than it had those who reported having done so.
Prospective homebuyers who believed they could save up their down payment within 10 years estimated it would take them three years and 10 months, on average. At the same time, 11% of prospective homebuyers thought it would take more than 10 years to save, and 32% did not think they would ever be able to so.
The likelihood of feeling it was impossible to save enough increased with age, with 22% of millennials saying this, compared with 37% of Gen Xers and 60% of boomers.
“Part of determining how long it will take you to save for a down payment comes down to figuring out how much house you can afford, including the mortgage payment, property taxes, homeowners insurance, homeowners association fees and mortgage insurance,” Kearns said.
She noted that the myriad of costs associated with homeownership, such as maintenance and repairs, also needed to be included in a buyer’s budget, as well as the time involved in keeping up a home or hiring tasks out to professionals.
The survey results suggest that many prospective homebuyers are flying blind when trying to figure out costs and how to afford them.
Asked about the minimum required down payment needed to buy a home, 51% of all respondents said they “don’t know” the answer. Twenty-eight percent said the standard recommended amount of 20% or more of the purchase price was required.
Just 2% guessed that the standard minimum requirement is between 0% and 5% of the purchase price, depending on the loan program.
Bankrate noted that responses were fairly universal across all generations, indicating that consumers generally were not fully aware of the numerous loan programs that provide an affordable entry into homeownership.
“Twenty percent of the purchase price has long been the recommended amount, however, many homebuyers don’t realize that conventional loans require just 3% of the purchase price as a down payment and some VA and USDA loans don’t require anything at all,” Kearns said.
“Local first-time homebuyer assistance programs can also lower your upfront, out-of-pocket costs substantially at closing.”
— Related on ThinkAdvisor: