It’s a tough market for first-time home buyers, but they can still find ways to make their dream come true, according to NerdWallet’s Q2 First-Time Home Buyer Affordability Report.
It’s not easy being a first-time home buyer. Traditionally, first-timers have lower incomes and less established credit than repeat buyers, and make smaller down payments (8% for first-timers, on average, versus 19% for repeat buyers). A typically priced home in Q2 2024 went for $439,000, meaning an 8% down payment is almost half of the median gross monthly income for Americans of first-time buyer age. That also means estimated monthly housing payments are close to $3,500. And the usual options—making a larger down payment, or choosing a different type of home or one in a different area—are not always possible for first-timers. (For the study, estimated monthly housing payments include the price of the home, the typical first-time buyer down payment, mortgage rate, real estate taxes, homeowners insurance, and PMI (private mortgage insurance), required on conventional mortgages financed with less than 20% down.)
And that’s just for the typically priced home. Estimated payments in some of the US’ largest metro areas were considerably. Los Angeles topped the list with payments at a whopping 115% of monthly gross income, followed by San Diego (88%), San Jose (73%), and New York (72%).
Buyers in the highest-priced markets will need higher-than-average incomes and larger down payments. With average home prices in excess of $1 million in these markets, purchases require jumbo mortgages (loans over $766,550), the Federal Housing Finance Agency’s cap for conforming loans, which require higher-than-average incomes and larger down payments.
First-time buyers might find better options by looking outside those areas, in communities where lenders offer loans on 3% down payments. Also, most states offer first-time home buyer programs that include down payment assistance and other benefits.
One way to decrease the monthly payment is simply to increase the down payment. Adding just a few percentage points, from 8% to 12%, can save the buyer several hundred dollars off the monthly housing cost. And if a buyer can put down 20%, they not only discount their monthly cost, they eliminate the PMI requirement and save that money, as well.
A few ways for first-timers to increase their down payment, therefore taking out a smaller loan:
- If you’re looking to buy in the next few months: Keep your down payment funds in a high-yield savings account, where it’s liquid but earning.
- If you’re looking to buy in a year or two: Squirrel away down payment money in a certificate of deposit that might offer higher yields.
Like other markets, the home buyers’ market is all about supply and demand. The current high prices are a result of an inventory deficit, with the current supply so low that not even the quarterly seasonal gains are enough to completely right the ship. While second quarter’s listings were up 17% over last quarter, and up an amazing 34% year-over-year, list prices still rose 4%. And while inventory is growing, the market is still not where it was at pre-pandemic.
And then there are starter homes, or lack thereof. Once upon a time, first-timers would buy a small house or a fixer-upper, just to get into the market at an affordable price point. But in these days of low inventory, starter homes are hard to find. Buyers must now expand their search by looking at a wider geographical area or looking at homes with different features or floor plans than what they’d ideally like … or both.
Click here to read more on NerdWallet’s Q2 First-Time Home Buyer’s Affordability Study.
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