Stop Doomscrolling: Homeownership May Still Be an Option

High interest rates, expensive homes and few of them to buy have led some young renters to feel hopeless about their homeownership prospects. Find out how first-time buyers find ways to overcome those obstacles.

The American Dream of homeownership is a nightmare these days. It’s so bad that some millennials and members of the Gen Z generation are running away screaming. Nearly one in five millennials (18%) and about one in 10 Gen Zers (12%) said they don’t think they’ll ever own a home, according to a recent Redfin survey . The main reason cited is the lack of affordability, with available homes considered too expensive.

The next biggest obstacle: the lack of ability to save for a down payment, cited by 46% of millennials and 33% of Gen Zers. But many of them don’t realize that they may not need to save as much as they think.

“There is a longstanding myth that you need to put 20% down to buy a home,” says Rob Chrane, CEO of Down Payment Resource , a site that connects people with down payment assistance programs. “While homebuyers should save for the upfront costs of homeownership, most will not need nearly this amount to cover them all.”

The typical down payment for first-time buyers is 6%, while repeat buyers typically make a down payment of 17%, according to the National Association of Realtors’ 2023 Profile of Home Buyers and Sellers .

About one-third of millennials and Gen Z respondents to Redfin’s survey also said that mortgage rates are too high, and about one in five in both cohorts said they need to pay off their student loan debt before they buy a house.

Still, millennials made up 28% of all buyers in 2022 and 4% of all buyers were Gen Zers, according to NAR, so there are ways to overcome these challenges.

Start a Conversation with a Lender

If you’re thinking about buying a home, always meet with a lender early in the process who can help first-time buyers better understand the additional costs and opportunities associated with homeownership, recommends Scott Lindner, national sales director for TD Bank.

“Against the backdrop of higher rates and low housing inventory, it’s especially important for borrowers to speak with mortgage professionals early in the process to create a well-adjusted budget and identify a comfortable price range for their homebuying search,” Lindner says. “Many lenders offer various products geared toward first-time and other homebuyers, so borrowers should have conversations with a knowledgeable, experienced mortgage professional about affordable product options.”

Conventional loans are available with as little as 3% to 5% down and FHA loans (Federal Housing Administration) require 3.5% down. VA loans for eligible members of the military and veterans, along with USDA loans for properties in rural areas, are available with zero down payment, Chrane points out.

Individual lenders also have special programs for buyers. For example, TD Bank offers several affordable mortgage programs with low down payment options that fit different financial needs.

“TD Home Access Mortgage is an affordable mortgage option that includes a $10,000 lender credit for purchase transactions which doesn't require repayment – this can really help first-time buyers with lowering their down payment or perhaps buying down their rate,” Lindner says. “The product also offers more flexibility with greater debt-to-income (DTI) ratios, expanded underwriting requirements, and credit parameters that increase accessibility, making it a great option for qualifying borrowers.”

Your debt-to-income ratio compares your gross monthly income with the minimum payment on all recurring debt such as your mortgage, credit cards, car loans, student loans and personal loans.

TD also offers TD Right Step Mortgage®, another affordable mortgage option that offers flexible qualification guidelines.

A lender can also estimate closing costs, which vary by location from 2% to 5% of the purchase price, according to Bankrate .

Get Help Funding a Home

Once you have an idea of your price range and loan options, look for ways to fund your purchase.

Nearly two in five (39%) homeowners have received down payment assistance of some type, according to a recent LendingTree survey . Among millennials, more than half (54%) received down payment help, with 27% receiving help from their parents, while 78% of Gen Z homeowners received financial support for a down payment, mostly (49%) from their parents.

If you have generous family members, you’ll need to work with your lender to make sure you follow the rules for your loan program about how much of your down payment can come from a relative. In many cases, a gift letter will be required to prove the funds won’t need to be repaid.

Among the 39% of homeowners who received help, 6% got help from their employers and 5% through homeowner assistance programs, according to LendingTree.

According to Down Payment Resource, there are more than 2,300 down payment assistance (DPA) programs nationwide. All 3,143 U.S. counties have at least one DPA program and more than 2,000 counties have 10 or more programs. The average DPA benefit is roughly $17,000.

 “Many programs also help homebuyers with closing costs, provide tax credits and offer affordable first mortgages,” Chrane says. “Many also allow you to layer multiple programs and even buy down your mortgage rate.”

Homebuyer assistance can range from thousands of dollars into six figures in high-cost housing markets, Chrane says.
 
“Program income and purchase price limits are often significantly higher than people realize, with income limits commonly exceeding 100% to140% of the area median income,” Chrane says. 

Some homebuyer assistance programs offer additional funding for homes that meet specific green building and energy efficiency standards, such as the First-time Homebuyer Green Program in Tuolumne County, California.

Homebuyers must qualify for a mortgage to qualify for down payment assistance, usually have a credit score of 620 or higher, and meet specific income or asset requirements. Most also require completion of a homebuyer education class.

Move Into Your Parents’ Basement

Depending on your relationship with your family, it may feel a bit extreme to give up your independence to live with them again. A recent Realtor.com survey found that one-third of millennials and Gen Zers who want to buy a home in the next year have moved in with their parents or other family members to save money. Another 24% said they would consider it.

Other popular options, according to the survey, are to relocate to a more affordable part of the country, move to a building with fewer amenities, switch to a less desirable neighborhood, choose a smaller rental unit or live with roommates.

Those are primarily temporary options for perhaps six months to a year to substantially increase saving for a home, but 83% of respondents also said that they would consider buying property with someone else other than a spouse or partner to make it more affordable. 

Family members are the most popular of those choices, with about 37% of respondents willing to consider purchasing a home to live in with a child, 27% with a sibling or cousin from within the same generation, 23% with their parents or in-laws and 21% with a grandparent. About 20% said they would consider purchasing with a friend and 15% would consider purchasing with a roommate.

Do the Side Hustle

If the thought of sharing your home with friends and relatives doesn’t appeal, you’ll need to find other ways to accumulate the funds you need for your home purchase. Approximately 40% of millennials and Gen Zers work at a second job to save for a down payment, according to Redfin’s survey. Other than setting aside money from a paycheck, a side hustle is the second most common way younger renters fund a down payment.

If you choose to work at a second job, just make sure you’re tracking your income and paying taxes appropriately. Lenders will need to know where your funds originated when you apply for a loan. Talk to your lender about whether that extra income can be used to help you qualify for a loan, which will depend on how consistent it is and how long you’ve been earning it.

Learn to Save for a House

Even if you have generous family members to contribute to your home purchase or qualify for down payment assistance, you’ll need to establish a budget to make sure you can comfortably take on the responsibilities and expenses of homeownership. Lenders will dig deeply into your finances, and while loan programs vary, most lenders prefer that your overall debt-to-income ratio is 42% or less.

“It's a general rule of thumb that you shouldn't spend more than 28% of your gross monthly income on your mortgage payment,” Lindner says. “And it's also important to factor in all housing expenses when determining the 28% rule, because while it is a great guideline, you must have a complete financial picture when determining your home buying budget.”

In addition to your principal and interest, your mortgage payment includes property taxes and homeowner’s insurance. You may also need to pay homeowner's association dues. Your budget should include money for utilities, which will be less if you buy an energy efficient home or make improvements.

“Don’t forget to save for moving, setting up utilities, home furnishings, repairs, renovations and a home emergency reserve fund,” Chrane says. “Avoid making large purchases, not just to save money, but to avoid driving up your debt-to-income ratio and reducing cash reserves, which can cause your lender to pull funding.”

Improve your Credit

Most lenders require a credit score of 620 or higher, Lindner says. However, there are some loan options with lower credit score requirements.

“It’s a common misconception that borrowers must have a high credit score to buy a home,” Lindner says. “I encourage borrowers not to get hung up on their credit score and rule themselves out of the process before it even starts.”

Lindner recommends monitoring your credit score and making sure your credit report is accurate. You can check your credit report for free at AnnualCreditReport.com . Many credit card companies and banks offer free credit monitoring, too.

“Your credit score not only impacts mortgage approvals, but it also impacts the pricing of the loan,” Lindner says. “High credit score borrowers typically receive lower rates and pay less points on loans.”

 Keeping credit card usage low and paying your bills on time can improve your credit score, but if you don’t know where to start to raise your credit score, Chrane suggests talking to a HUD-certified homeownership counselor .

“They can help you budget, create a savings plan, optimize your credit score and more,” Chrane says. “Even if you are a year or two out from buying a home, connecting with a homeownership counselor now can help you move toward your dream faster.”

High interest rates, high home prices, student loan debt, a lack of savings or a low credit score can be a hindrance to buying your first home, but they are also challenges that can be overcome.

“If you want a home badly enough, there are people who can help lead the way, down payment assistance programs to help offset costs, and a future of building equity to look forward to,” Chrane says.