When home prices rise, the down payments required to purchase those homes also climb. So it should be no big surprise that in today’s extreme seller’s market, median down payments are at record highs. Here’s why: Home prices nationally jumped 10.4% in February compared to the same time in 2020.
States that have seen a hefty hike in appreciation like Idaho, which saw a 22.6% increase in home prices, might hurt first-time homebuyers who are now facing much bigger down-payment requirements.
Find out where your state ranks in down-payment size and the percentage of a home’s sale price that buyers are willing to put toward the down payment.
States with the Highest Median Down Payment
The top 10 states (including the District of Columbia) with the highest median down payments are primarily concentrated in the West. Still, there are a few outlying states in the Northeast and two that are not part of the continental U.S. in the top 10.
California and Hawaii are tied for first place, with median down payments hitting six figures.
States with the Lowest Median Down Payment
Lucky for some, the price of entry to homeownership is not equivalent to a Ferrari. Twenty-three states have median down payments of $30,000 or less, while 10 states can boast even more affordable median down payments of $20,000 or less.
States with the lowest down payments are mainly in the South and Midwest. Leading the low down-payment pack is West Virginia, with a median down payment of just $11,000, followed by Oklahoma ($14,000) and Louisiana ($15,000).
Homebuyers Are Putting a Larger Share of the Home Price Down
Fortunately, there are no hard and fast rules for how much homebuyers must fork out upfront. FHA loans, for instance, still offer a 3.5% down payment option for borrowers who qualify, while VA loans have $0 down payment options. Many lenders, various government-sponsored programs and private organizations offer their own low down-payment loans and grants to qualified borrowers.
However, despite low down-payment options, buyers are putting a larger portion of the purchase price down today than they have in recent years. In 2019, the average down payment was 12%, while today homebuyers are putting closer to 16% down, says George Ratiu, senior economist at Realtor.com. That increase is still not enough for many borrowers to avoid having to pay mortgage insurance, which will make your monthly payments more expensive.
Although there’s no definitive reason why people are putting more down, Ratiu says that the competitive buying landscape is playing a decisive role.
“This is very recent that buyers are putting around 16% down. I think it’s because of the extremely hot market,” Ratiu says. “If you have a few preapproved buyers, the one with a larger down payment is usually viewed as the one with the most solid offer. They have more invested, and so buyers believe their deals will more likely go through than someone with a lower down payment.”
People in expensive states tend to put a more considerable percentage of the purchase price toward the down payment. The two most costly down-payment states—Hawaii and California—also claim the top two spots for the largest percentage down, 20.3% and 19.7%, respectively.
But even states with relatively low down payments are inching above the 16% down payment level. For example, in Wisconsin and Tennessee, where the median down payment is around $25,000 and $26,000, respectively, buyers are putting down 16% of the purchase price.
The top 10 states where people cough up the smallest percentage of the purchase price are everywhere but out West. From Georgia to Vermont and over to Ohio, these states represent the lowest down payment by the percentage of the purchase prices, which can be especially helpful for first-time homebuyers.
West Virginia gets the blue ribbon with just 12.2% down, followed closely by Louisiana (12.4%), Oklahoma (13.2%), Alabama (13.3%) and Michigan (13.6%).
How Are Today’s Homebuyers Financing Down Payments?
Most experts Forbes Advisor spoke with said the two primary funding sources for down payments were monetary gifts from family and friends, and a loan from the homebuyer’s 401(k). A distant third was savings.
“Shake the family tree,” says Tim Ross, CEO at Ross Mortgage Corporation, headquartered in Troy, Michigan. “A gift from a family member that does not require repayment is a common way for a prospective homebuyer to come up with a down payment.”
A 2019 survey by the National Association of Realtors survey showed that 32% of first-time homebuyers and 8% of repeat buyers received a monetary gift from friends and family. For homebuyers who don’t have the family tree advantage, their 401(k) might be the best and only option.
Before you touch your retirement savings, however, it would be wise to consult a financial advisor about your current financial situation, and what your retirement and even career goals are.
Remember that once you dip into your 401(k), you can’t get that money back, so you’re borrowing from your future. This makes the homebuying process that much more serious—you want to make sure the house you buy is a smart investment that’s worth dipping into your savings.
Two Ways to Take Money From Your 401(K) For Your Down Payment
The rules for 401(k) plans differ by employer, so be sure to check your employer’s specific rules to find out your best options.
In general there are two ways to tap your 401(k) savings:
- Withdrawing the funds directly
- Borrowing from your 401(k)
Withdrawing Funds Directly
If you withdraw money from your 401(k) before the age of 59 ½, you will incur penalties, and you will have to pay income taxes on the amount you withdraw unless your financial need falls under the “hardship withdrawal” rule. In this case, you won’t pay penalties, but you’ll still owe income taxes. Many 401(k) plans consider withdrawing money for a home down payment a hardship withdrawal. If you don’t qualify for a hardship withdrawal, you will have to pay a 10% penalty, per IRS rules.
Since the money you take out is considered income, you might get moved into a higher income bracket, which can affect your taxes. Again, it’s important to talk with a financial advisor or accountant about withdrawing money from your 401(k) and what this means for your taxes.
Borrowing from Your 401(k)
Taking out a loan against your 401(k) might be a better option than simply withdrawing the money. For one, you won’t have to pay early withdrawal penalties or income taxes. However, you will have to repay the borrowed amount. The good news is that the interest you pay on your 401(k) loan goes back to you.
The loan term depends on your provider. Borrowers who are using the money to buy a house usually have more than five years to repay the loan.
If you don’t repay the loan within the designated time frame, the status will change from loan to withdrawal, which means you would have to pay income taxes and early withdrawal fees.
Using Piggyback Loans to Make a Down Payment
Another way people are financing today’s colossal down payments is through a second mortgage, often called a “piggyback loan.” Usually, these second mortgages are home equity loans which have higher, adjustable rates.
“Depending on your individual financial scenario, a second mortgage may be a viable alternative to fund your down payment,” says Kevin Quinn, senior vice president of retail lending at First Internet Bank. “By increasing your down payment amount, you may be able to avoid mortgage insurance, thereby allowing yourself a lower monthly mortgage payment.”
These are typically designed for people who have less than a 20% down payment and want to avoid mortgage insurance (which kicks in if you put less than 20% down).
Generally, to qualify for a piggyback loan you would have to put 10% down, the main mortgage would cover 80% of the purchase price and the piggyback loan would cover the remaining 10%.
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