With sky high housing prices, strict credit requirements, and mounds of student debt, it can be tough for parents to cut the financial cord to their adult kids.
More and more young homebuyers are relying on friends and family to scrounge up enough cash for a down payment for a home. This number tripled during the recession of 2008 since before the housing crisis, where 21 percent of homes were purchased with a loan or gift as the down payment. That number was only 8 percent before 2008’s economic debacle.
First-time homebuyers who purchased in the years following the recession were approximately twice as likely to have tapped into friends and family for a down payment compared to those who purchased after the recession. In 2014, one-quarter of the middle-income homebuyer demographic used money from friends and family to put towards a down payment.
Personal Savings Pose a Real Challenge
In addition to all the obstacles that homebuyer hopefuls are facing these days, a major one is a shortage in sufficient savings. In order to buy a home, first-time homebuyers need a sizeable chunk of change to put down on a house, which can be downright difficult these days. Rising rents and housing prices, high student debt, and weak economic and income growth are making this even more challenging. This is precisely why an increasing number of buyers are turning to their moms and dads for some financial assistance.
While homebuyers can put as little as 5 percent down for a conventional mortgage, it can still be a huge amount of money to be able to gather. For instance, even a $250,000 home would still require $12,500 as a down payment – an amount that isn’t feasible for those still paying off their student debt. And the smaller the down payment, the higher the monthly mortgage payments would be.
Not only that, but any down payment less than 20 percent of the purchase price would mean that private mortgage insurance (PMI) would be required. That’s just an added expense that cash-strapped young homebuyers don’t need. The smaller the downpayment and lower the credit score, the higher the PMI rate would be.
The increasing importance of loans and gifts in the home-buying process highlights the challenge of securing a decent down payment for younger homebuyers.
Loans and Gifts For Down Payments Differs Across Ethnic and Income Demographics
It’s important to note the difference in reliance on down payment help from family and friends across ethnic and social income groups. As far as ethnicity goes, Asians are far more likely to receive a gift from family and friends in the form of a down payment – 23 percent, to be exact – compared to non-Hispanic blacks who are least likely (7 percent) to receive down payment help in the same form.
Middle-income earners were most likely to receive down payment assistance, compared to those in the lowest and highest income earning brackets (15 percent and 16 percent, respectively).
Borrowing from the “Bank of Mom and Dad” does not seem to be losing steam, and will likely continue for those who are having a tough time trying to gather that 20 percent down payment. For those who don’t have such resources to take advantage of, there are other creative mortgage options available. Speak with your mortgage specialist to find out if any of them could work in your favor.