As more millennials reach the ages when they're considering buying their first homes, the dire predictions that they would be too burdened by student loans or are too fond of pricey treats like avocado toast to qualify for mortgages have not come true. Millennials (ages 18-34) plan to buy homes in the next five years in much greater numbers than Generation X (ages 35-54) or baby boomers (55+), according to a new NerdWallet study.
Coming up with a large sum of money for a down payment is one of the biggest obstacles to homeownership. To explore what millennials and other generations of Americans understand about down payments, how they overcome this stumbling block and what else might be keeping them from buying a home, NerdWallet recently commissioned an online survey of more than 2,000 U.S. adults conducted by Harris Poll.
"The study shows that there's a good deal of disagreement about how much you need to save for a down payment," says Tim Manni, mortgage expert at NerdWallet, "although that may be understandable, considering how many different loan options there are these days.
"It also showed that people are finding creative ways to pull that down payment together — and for millennials, in particular, that they would even make sacrifices like putting off weddings and having kids in order to save up that money."
Approximately 2 in 5 Americans (41%) have purchased a home in the past five years and/or plan to purchase a home in the next five years
48% of millennials said they plan to buy a home in the next five years, and they are much more likely to do so than other generations; 33% of Gen Xers and only 16% of baby boomers expressed the same intention
44% of Americans believe you need a down payment of 20% or more to buy a home
68% of Americans who do not currently own a home as their primary residence say they face an obstacle to buying a home now; 44% of Americans who don't own a home said a lack of down payment savings is the stumbling block
79% of Americans who plan to purchase a home in the next five years would be willing to make sacrifices to save for a down payment, such as delaying marriage and/or having kids
How much do people think they need for a down payment?
There’s a common belief that the amount required for a mortgage down payment is 20% of the home price. While 20% is the down payment needed to get a conventional mortgage and not pay any private mortgage insurance, or PMI, it’s far from a hard-and-fast requirement for qualifying for a mortgage. VA loans require no down payment; Fannie Mae and Freddie Mac have 3% down programs; FHA loans allow down payments as low as 3.5%; many banks and online lenders now offer their own low-down-payment mortgages; and several state and local governments offer down payment assistance programs to residents.
Despite the availability of low-down-payment options, nearly one-third of Americans (29%) believe that exactly 20% is needed for a down payment. Viewed by generation, 21% of millennials believe this is required, as do 27% of Gen Xers and 36% of baby boomers.
“While the highest proportion of millennials have a very accurate perspective on what amount is currently needed for a down payment — 24% of millennials think you need to put just 6% to 10% down — a similar percentage are way off, as 23% of millennials think you need to put more than 20% down,” Manni says. “While it’s hard to say whether this means millennials are savvy or confused about down payments, there is definitely some misinformation and confusion among millennials regarding how much money is actually required to purchase a home.”
How are people coming up with a down payment?
We asked what assets people had used — or expected to use — to pull together a down payment (respondents could select multiple options).
Relying on personal savings
Of those who bought a home in the past five years and don’t plan to purchase in the next five years, 59% had used personal savings for part or all of their down payment; 65% of millennials say they did this, while 51% of Gen Xers and 61% of baby boomers say the same.
Of Americans who plan to buy a home in the next five years, 66% say they would use personal savings for a down payment. Millennials were more likely to say this than Gen Xers: 74% of millennials plan to use personal savings, compared with 58% of Gen Xers.
Relying on a spouse’s/partner’s savings
Prospective millennial buyers were also more likely than other generations to say all or part of their down payment would come from a spouse’s or partner’s personal savings: 37% of millennials say this, compared with 23% of Gen Xers and 17% of baby boomers.
Of those who bought a home in the past five years, 28% used the savings of a spouse or partner for a down payment. Over a third (34%) of recent millennial buyers relied on their partner’s savings, while 24% of Gen Xers and 25% of baby boomers did the same.
RELYING ON MONETARY GIFTS
Gifts from family members played a part in some down payment plans. Among those planning to buy within five years, 14% of millennials say they would use a family gift in their down payment, compared with just 10% of Gen Xers and 4% of baby boomers.
Among those who had purchased in the past five years, exactly 14% of millennials used family gifts — the same proportion as prospective buyers — while about 1 in 5 Gen X and baby boomer recent purchasers (19%) used family gifts.
How long does it take to save?
Millennials take the longest to save for a down payment, our survey found. Members of this generation who purchased a home within the past five years reported it took them 3.75 years, on average, to save for their down payment, while it took Gen Xers 3.42 years and baby boomers 2.75 years, on average.
The 2016 Consumer Expenditure Survey by the Bureau of Labor Statistics showed similar results. Millennials save $7,624 per year while Gen Xers save $12,347 per year. Assuming a 10% down payment on a $323,300 purchase mortgage, it would take millennials 4.2 years to save, and Gen Xers 2.6 years to save. The data in this survey couldn’t be applied to the “average” baby boomer since a large portion are retired and not earning and saving at the same pace as the other generations.
What’s keeping people from buying a home?
According to our survey, 68% of Americans who don’t currently own a home report that something is keeping them from buying a home now. There are strong differences among the generations: Only 42% of baby boomers reported a barrier, compared with 73% of Gen Xers and 82% of millennials.
The top problems cited are not having enough money for a down payment (44%) and having debt (29%).
The biggest struggles that millennials face when it comes to buying a home — issues like the lack of a down payment (50%), debt (35%), not being able to find an affordable home in the area where they want to live (35%) and fear of not being financially stable after buying (34%) — are very similar to Gen Xers' hurdles.
There are a few factors, however, that millennials were more likely than other generations to report as preventing them from buying a home.
One is being unable to afford to buy a home in the area they want to live in. Over one-third of millennials (35%) reported this problem compared with 25% of Gen Xers and 19% of baby boomers. Another challenge facing millennials more than older generations is not being able to find a home that meets all of their wants and needs: This issue affects 19% of millennials, compared with just 7% of Gen Xers and 7% of baby boomers.
According to a 2017 study by Experian, student loan debt in the United States has grown to a record high of $1.4 trillion, and millennials face more student loans than any other type of debt. Additionally, student loan debt affects millennials at a higher rate than other generations: 19% of millennials say their student loans are a stumbling block to homeownership, compared with 11% of Gen Xers and just 3% of baby boomers.
Despite facing hurdles to homeownership, millennials are buying their first homes at a younger age than older generations. Among Americans who have purchased their first home, the average age when they bought their first home was 29.4; for millennials, it was 25.2. For Gen Xers, the average age was 29.4, and for baby boomers, it was 30.4. Over a third of millennial home buyers (35%) bought their first home between ages 18 and 24, compared with 19% of Gen Xers and 23% of baby boomers.
What are people willing to give up for a down payment?
Of Americans who plan to buy in the next five years, 79% say they would make a sacrifice to save for a down payment.
Younger home buyers are more game to make sacrifices to save: Only 59% of baby boomers who plan to buy in the next five years say they would be willing to do so, compared with 90% of millennials and 77% of Gen Xers. (Of course, that may be because older Americans have equity in their houses that they plan to use for their next down payment.)
When it comes to specific trade-offs, millennials are more likely than older generations to say they would be willing to give up certain things to save for a down payment.
According to the survey, 59% of millennials would be willing to forgo a vacation, compared with 47% of Gen Xers and 45% of baby boomers. Forty-two percent of millennials would be willing to make coffee at home instead of buying it, compared with 34% of Gen X and 29% of baby boomers. Nearly a third of millennials (28%) would be willing to delay having children, compared with 12% of Gen X. Nearly a quarter (24%) of millennials would be up for delaying a honeymoon, compared with 13% of Gen X, and 18% of millennials would be willing to delay marriage to save for a down payment, while just 9% of Gen Xers are willing to do the same.
However, there may be a gap between one’s plans and one’s experience. Of those who have bought a home in the past five years and don’t plan to buy in the next five years, just over one-third (36%) said they made changes to save for a down payment for a home. Roughly 1 in 10 reported they got a part-time job (12%), delayed having kids/getting married (11%), or going on a honeymoon (7%) to save for a down payment.
“In the end, everyone has to figure out their own trade-offs and sacrifices to save for the down payment they need,” says NerdWallet’s Manni. “A tool like this calculator can be a fun way to start the process of thinking about what would or wouldn’t work for your budget and your lifestyle.”
4 considerations when saving for a down payment
When it comes to saving for a down payment, home buyers of all ages need to determine an amount that's best for their financial situation. Here are four factors to consider when saving for a down payment:
Have you saved enough? Not saving enough for your down payment can be very costly over the life of your loan. The more you can save for a down payment, the more loan options you’ll have, and the lower your monthly payment and interest rate will be.
Have you saved too much? For those who are putting less than 20% down, there are scenarios in which you don’t have to put the entire amount you have saved toward your down payment. You can put less money toward your down payment and still pay the same amount of mortgage insurance. This way, you can set a portion of your cash aside for expenses such as closing costs or home furnishings.
Paying PMI isn’t always bad. Trying to avoid PMI completely can wind up costing you in the long run. You could delay purchasing a home for years while trying to save the 20%, which may not be necessary given the various down payment options in the market. Or your lender could increase your interest rate in exchange for you not paying PMI, which could cost you a lot in interest over the life of the loan.
Don’t forget about closing costs. Some home buyers get so wrapped up in saving for a down payment that they forget about the substantial bill that awaits them at closing. Closing costs tend to be about 2% to 5% of the loan amount. Five percent of a $250,000 loan is $12,500. That’s not pocket change. Learn more about how to save on closing costs.
This survey was conducted online within the United States by Harris Poll on behalf of NerdWallet from August 3-7, 2017, among 2,141 U.S. adults ages 18 and older, among whom 824 purchased a home in the past five years or plan to purchase a home in the next five years. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables, please contact Maitri Jani.  These are respondents who bought a home in the past five years and don’t plan to purchase in the next five years.  Please note low base size for those who purchased in last five years and don’t plan to purchase in next five years (millennials n=65; Gen X n=90; baby boomers n=73). This data should be interpreted as qualitative and directional in nature.