Down Payment Assistance Could Dramatically Cut the Time to Save for a Home

A new analysis by Zillow shows that down payment assistance could help the average American household save for a home 18 months sooner while expanding the number of homes within its budget.

Zillow noted that a median-income household would need an estimated 4.2 years to save enough money for a 10% down payment on a typical U.S. home. Zillow found that with assistance covering 3.5% of the purchase price, that time would fall to 2.7 years.

The down payment assistance also could lower annual housing payments by $1,080 and make an additional 26,338 homes affordable to median-income buyers nationwide, Zillow said.

The findings show how down payment assistance programs could address one of the biggest barriers to homeownership: the difficulty of accumulating enough savings to buy a home, particularly as housing costs and mortgage payments remain elevated.

Assistance Hastens Saving

Zillow’s analysis assumes a buyer purchases a typical home valued at $366,157, using an FHA mortgage with a 6.78% interest rate, the average rate for FHA loans in September. Zillow’s calculations include estimated property taxes, insurance, and maintenance costs.

Down payment assistance could help the typical American household save for a home 18 months sooner while expanding the number of homes within its budget, according to a new analysis by Zillow.

A median-income household would need an estimated 4.2 years to save enough for a 10% down payment on a typical U.S. home. With assistance covering 3.5% of the purchase price, that time would fall to 2.7 years, Zillow found.

According to the Zillow analysis, a buyer making a 6.5% down payment would face an estimated monthly housing payment of $3,010. With down payment assistance covering an additional 3.5% of the purchase price, the payment would drop to $2,920. That saves the buyer $90 a month, or $1,080 annually.

Zillow also said the savings could expand the pool of homes within reach of households earning the median income.

In September, 359,434 active listings were considered affordable to the hypothetical buyer making a 6.5% down payment, representing 25.7% of homes listed for sale. With the additional assistance, Zillow said, another 26,338 listings would become affordable, increasing the share to 27.6%.

Expensive Housing Markets

Down payment assistance could have the greatest effect in expensive housing markets, where saving for a down payment can take many years, Zillow noted.

In Los Angeles, for example, a median-income household would need 9.1 years to save for a 10% down payment on a typical home. With assistance covering 3.5% of the purchase price, that period would fall to 5.9 years. That’s a reduction of 3.2 years.

The financial benefits would be concentrated in high-cost markets, Zillow said.

Annual payment savings would reach $4,608 in San Jose, $3,396 in San Francisco, $2,880 in Los Angeles and $2,808 in San Diego. New York buyers would save an estimated $2,160 annually, Zillow noted.

Dallas would see the largest increase in the number of listings newly affordable to buyers receiving assistance, with 864 additional homes entering the affordable range.

Could Cover Whole Down Payment

Atlanta would add 712 listings, followed by Miami with 558 and Washington, D.C., with 555, Zillow said.

Zillow’s analysis also highlights the potential role of assistance for buyers using Federal Housing Administration loans. FHA loans generally require a minimum down payment of 3.5%. That means assistance at that level could potentially cover the entire down payment for an eligible buyer.

A smaller down payment can increase monthly mortgage costs, however, and buyers must still qualify for a loan and be able to afford their ongoing housing expenses.

Previously, Zillow found that one in five renter households headed by someone ages 29 to 43 could afford the monthly cost of owning a typical home in their market with a down payment of just 5%.