First-time homebuyers seek help from family members through co-signing
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Contrary to common belief, Americans can use various sources to pony up for a down payment, according to Freddie Mac’s May Economic and Housing Research Insight.
The report, which examined the perceptions of potential homebuyers on down payments, found that nearly a third of Americans think they need to put more than 20% down for a home they intend to buy in the next three years.
“In addition to the common misbelief that lenders require a 20% down payment on a mortgage, borrowers often mistakenly believe that a down payment can only come from savings,” said Freddie Mac Chief Economist Sam Khater. “While borrowers most often use savings for their down payment, they also frequently use assistance from government or nonprofit organizations, gift money from friends and family, and seller contribution or proceeds from a previous home sale.”
The GSE used the National Survey of Mortgage Originations (NSMO) and its internal data to determine how families and others help borrowers in qualifying for a mortgage through down payments and co-signing. Freddie Mac found that the number of homebuyers who used savings, inheritance, other assets, or retirement monies for a down payment, declined to 70% in 2016 from 79% in 2013.
The analysis revealed that over four years, 31% of homebuyers used proceeds from the sale of another property for a down payment, up from 23% in 2013. More homebuyers also used assistance or a loan from a nonprofit or government agency, up from 5% to 10%.
Overall, 61% of respondents in 2016 used down payment sources besides savings or help from friends and family. Excluding personal savings, approximately 85% of NSMO used only one source of funds for their down payment.
“We believe the demand for down payment assistance of all types will increase in the coming years as more Millennials look to become homeowners,” said Khater. “Nearly 25% of borrowers turn to ‘The Bank of Mom and Dad’ to help with the down payment. Moreover, family members are also providing support by co-signing for a mortgage or listing themselves as a co-borrower, especially among first-time homebuyers. Unfortunately, that won’t help everyone.”
Last year, 3.2% of first-time homebuyers listed a family member who was 55 years or older as a co-borrower, according to Freddie Mac’s portfolio of purchase loans. In expensive markets like San Jose, 7.2% of first-time homebuyers listed a family who was 55 years or older as co-borrower.
Khater said there might be a faster way for first-time homebuyers to afford homeownership.
“The findings suggest a real opportunity for the mortgage industry to educate borrowers about low-down-payment products and sources of down-payment assistance beyond personal savings,” Khater said. “Doing so may help more first-time homebuyers realize the dream of homeownership sooner.”
