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Twenty percent has long been regarded as the gold standard of downpayments. But as more Millennials look to enter the LA real estate market, some saddled with student loan debt and others jumping from gig to gig, socking away enough cash to cover 20 percent of the purchase price of a home can seem like a lofty, if not impossible goal.
Bank of America’s 2018 Homebuyer Insights Report breaks it down in more detail — let’s say you’re raking in $60,000 a year, the average household income in LA, and are looking to buy a median-priced home for around $647,000. According to these metrics, it would take you 10.75 years to meet your 20 percent savings goal of $129,400, by which point home prices may have increased even further.
So, are first-time homebuyers in Los Angeles actually managing to cough up that coveted 20 percent? Well, it depends who you ask. “One hundred percent of my first-time buyer clients have put down 20 percent,” says realtor Meredith Gruszka. “I work mostly with Millennial first-time buyers who have either saved up enough money to put down 20 percent or have gotten money from their families as a gift.”
Mortgage broker Julie Aragon offers a slightly different take. She says less than half of her clients are able to put down 20 percent. “It’s not the majority and usually it’s with some assistance — it’s not entirely their own savings,” says Aragon.
Photo: 401(K) 2012/Flickr
While the Bank of Mom and Dad may giveth to some, it’s certainly not a viable option for all. Those hoping to get a foot on the property ladder sooner rather than later often turn to Federal Housing Administration (FHA) loans or Veterans Affairs (VA) loans in lieu of conventional lenders. FHA borrowers can put as little as 3.5 percent down, while VA loans allow the buyer to put no money down at all if they are a current or former member of the US Armed Forces.
Aragon says that depending on your financial situation, conventional lenders may even grant you a mortgage on a home worth up to $2 million with just 10 percent down. “These types of loans can be perfect for high income earners who maybe just got out of business school or only recently paid off their student loans,” explains Aragon.
Buyers who put down less than 20 percent are usually required to pay mortgage insurance, which gets tacked onto your monthly housing expenses — costing between 0.5 and 1 percent of the total loan amount. “Mortgage insurance isn’t a bad thing because it gets [the buyer] into a house and they can start building equity that way,” says Aragon.
However, just because you can put down less than 20 percent doesn’t mean that you should. “In the LA market, most first-time buyers have a budget of under $1 million and that’s the most competitive price point,” notes Gruszka. “Two years ago, there would be 45 offers on a house that was priced accordingly, and even now you can get into multiple offers. It’s more like four to six offers on the table, but you’re still competing.”
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Sellers may reject an offer with an FHA or VA backed mortgage for any number of reasons. One you’ll hear time and time again is a buyer who puts only 3.5 percent down doesn’t have enough “skin in the game,” meaning they might pull out of the deal due to a lack of funds.
While this can certainly be an obstacle for first-time buyers without a sizable downpayment, it doesn’t cut you out of the game entirely. It just depends on where you’re looking to buy. “I grew up in Long Beach and my clients there are more likely to put five or 10 percent down,” says Aragon. “On the westside of LA, I think [buyers] are often earning more money, so they’re able to save more for a downpayment.”
If it seems like the odds are stacked against your less-than-20-percent downpayment, meet with a financial planner or mortgage expert six months to a year before you’re aiming to buy. With all of your financial ducks in a row, you’ll have more options and more knowledge of the LA market. And in the meantime, keep saving and “skip that avocado toast,” quips Aragon.