Photo: Robert Clark

Saving for a downpayment is often the biggest hurdle for first-time buyers. Despite a recent uptick, the Millennial homeownership rate still lags far behind that of previous generations.

Even with a booming economy and strong job market, national wage growth hasn’t kept up with rising home prices. That, along with large amounts of student loan debt, has kept many American Millennials out of the housing market — despite a strong desire to own their own homes.

Nine out of ten Millennial renters want to purchase a home, but very few have plans to do so in the immediate future, according to a new report from the listing site ApartmentList. In fact, over a third say they plan to buy in five years or more. Not being able to afford a downpayment was one of the chief reasons given for not buying sooner.

Here are a few things prospective buyers should know about downpayments before they take the plunge into home ownership :

1. Know your options and the risks

According to Apartment List, some 62 percent of prospective buyers said they can’t afford a downpayment. And while 20 percent down is the standard, it is not written in stone. Buyers can put down more or even less — much less. There are assistance programs to help first-time buyers purchase a home with as little as 3 percent down.

Putting 3 percent down shaves a lot of years off a savings plan, but it does have a downside.

“While those programs could be very advantageous, putting down less than 20 percent often results in added costs from higher interest rates and mortgage insurance premiums,” Chris Salviati and Rob Warnock, the authors of the report, tell Livabl.

But as difficult as it may be to save up 20 percent, it could give buyers an edge.

“If a seller has three offers, one with 25 percent down, one with 20 percent and one with 3 percent, which offer do you think they’ll accept?” asks Bridget Harvey, a licensed real estate associate with Douglas Elliman.

2. Saving takes time — a lot of time

At their current rate of saving, it could take over 20 years for two-thirds of Millennial renters to put away a 20 percent down payment. ApartmentList estimated that only 11 percent of Millennials who plan to buy will be able to save enough for a 20 percent down payment within the next 5 years.

In each of the metros ApartmentList analyzed, it estimated that fewer than half of Millennials will have a 20 percent down payment saved before 2038. Depending on the market, prospective buyers would need to save anywhere from $44,000 in Louisiana (based on a median home price of $220,000) to over $200,000 in California (based on a median home price of $1 million).

Reverse engineering a budget is one way to stay on track.

“First figure out how much you need to save to buy your dream home in your market, and when you want to buy. Look at the numbers realistically and see how much you can afford to save and where you might be able to make some cuts,” says Harvey.

3. Gifts and financial assistance

ApartmentList asked survey respondents how much financial support they expect to receive toward a downpayment from family and other outside sources, and found that nearly 20 percent expect some amount of help.

And gifts can certainly expedite the savings process. Among Millennials earning more than $50,000 and expecting help with a down payment, ApartmentList estimated that nearly 33 percent would be able to secure a 20 percent downpayment within the next five years, compared to 20 percent of those with similar earnings but no expected assistance.

But no matter how much or how little assistance you get, remember that it will take time to source any gifts you receive. In other words, get the money into your account as soon as possible to avoid delays later on.

“Because of the Patriot Act, the bank looks at two months of statements and if there is a large deposit from overseas, it has to be sourced and that can delay the process if the country of origin doesn’t handle statements the way the US does,” says Harvey.

4. Always expect the downpayment to be larger

According to ApartmentList, many prospective homebuyers expect to purchase homes that are priced well below the median in their market — a highly unlikely scenario given the current lack of starter home inventory in most markets throughout the country.

“In Phoenix, for example, a 20 percent down payment on the median-priced condo amounts to $33,400, but our survey respondents in the area expect to need $17,610, on average,” reads the report.

A good way to get a sense of your market and what you can afford is to attend open houses.

“Open houses are free to attend and buyers should attend a lot of them. They give a real-world view of what they can get for their money, and also help buyers nail down what they really want and don’t want in their ideal home,” says Harvey.

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