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Down payments posing a roadblock for renters to become owners

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Paying for a mortgage is still more affordable than renting in the U.S., but saving enough money for a down payment has become increasingly difficult for first-time buyers, especially in markets where home values are rising rapidly.

With the majority of renters in the largest metros putting about 30 percent of their monthly income toward a rental payment, saving money for a 20 percent – or even 10 percent – down payment is extremely difficult. First-time homebuyers and millennials are left trying to find other ways to break into the housing market, turning to friends and family for financial help. In 2014 alone, 13 percent of home purchases were bought using a loan or gift from friends or family for the down payment.

Rental affordability worsened in 28 of the 35 largest metros over the past year, and mortgage affordability worsened in just 18 of them.

According to a third quarter Zillow analysis of U.S. rental and mortgage affordability, residents of the Denver metro can expect to spend about 21 percent of their income on a mortgage, compared to 34 percent on rent. In the U.S. as a whole, homeowners can expect to spend 15 percent of their income on a mortgage, and 30 percent on rent. But getting that mortgage payment requires a homebuyer to have saved $62,760 for a 20 percent down payment – the industry standard – on a median-valued Denver home, which is $313,800.

In the Boston and Miami markets, the median monthly mortgage payment requires just 22 and 20 percent of monthly income, respectively. Renting is substantially more expensive, influencing many renters to start thinking about purchasing a home; 35 percent of the median income pays the median rent in Boston, and 44 percent in Miami. However, to purchase a home in Boston, a 20 percent down payment is $76,220. In Miami, buyers need to have saved $44,680.

Breaking into the housing market is less of a challenge in more affordable markets, like Cleveland. A 20 percent down payment on the median home there is $25,000, or $12,500 for 10 percent down. Residents of Cleveland can expect to spend 11 percent of their monthly income on a mortgage payment. Renters in Cleveland spend quite a bit more on rent: 27 percent of their monthly income.

“In general, paying a mortgage is more affordable than renting, and has been for some time. Unfortunately, many current renters aren’t able to realize the savings that come with homeownership because as home values and rents keep rising, it’s getting increasingly difficult to clear the down payment hurdle,” said Zillow Chief Economist Dr. Svenja Gudell. “It’s not uncommon for a 20 percent down payment on even a modest home to represent savings of $50,000 or more in some areas. And that number itself is a moving target, rising as home values escalate and harder to achieve as more money goes to landlords and less goes to savings. Using a smaller down payment is an option, but often comes with the added cost of mortgage insurance. Knowing this, it’s no wonder that many current renters are waiting longer to buy a home and are turning to alternate sources, including friends and family, to help them scrape together a down payment.”

In 34 of the largest 35 metros, rental affordability is worse than the historical average. Pittsburgh is the only housing market where residents pay less than the historical average for rent, about 25 percent of income; historically, renters in Pittsburgh spent 27 percent.

source: press release from Zillow