You hear almost every day, especially from millennials and first-time homebuyers, that’s it’s almost impossible to buy a house today. And while it’s true that wages are struggling to keep up with housing prices, it wasn’t necessarily a picnic for your parents or grandparents either to purchase a house when they were just starting out. While it’s true the average house ran about $25,000 back in 1970, the average salary then was about $6,000 a year. In other words, that house your mom or dad bought then cost roughly 4x their average annual salary.
Now, let’s jump to 2018. Bowing to the ease of using round numbers, let’s say the average household pulls in about $100,000 a year. Those are two people living together who make $50,000 each.
And for argument’s sake, let’s say this couple is seeking to buy a home (okay, a condo in Los Angeles) for about $500,000, or about 5x their annual household income.
Here’s the point: You likely had to scrimp and save to buy a house in 1970, and you will likely have to do the same -- or even save and work a little harder -- in 2018, but buying a house wasn’t impossible then and it isn’t now, if that’s truly your goal.
Level the playing field
In fact, you might be able to level the playing field with the 1970s, if you take advantage of new laws and programs that weren’t available decades ago. Back in the day (the 70s), for example, nearly everyone came up with a 20 percent down payment. Today, you can get away with down payments as little as 3 percent. And there are some programs, like Veterans Administration (VA) loans and others, that offer 100% financing. Indeed, 81 percent of Americans purchase their first home with less than 20 percent down.
So, you would be in good company. While, in an ideal world, it would be nice to come in with a large down payment to reduce the size of your monthly mortgage, it’s good to know, especially in an appreciating market, you may still get your foot in the door if you’re short on cash and unable to make the traditional 20 percent down payment.
On a $500,000 home that you might have your eye on, a 20 percent down payment would mean you would have to come up with a $100,000 down payment. Coming in at only 3 percent, however, means you would need only $15,000. That’s a big difference — an $85,000 difference!
If you’ve got parents or simply friends who like you enormously, they could donate to your housing cause by making a tax-free gift up to $14,000. Actually, your mom could gift you with $14,000 and your dad could donate the same for a grand total of $28,000. But wait, there’s more. Your significant other’s mom and dad could do the same for another $28,000, bringing your gift total to $56,000. That’s real money.
Of course, not everyone has bankable parents or other reliable parties waiting in the wings to donate to their housing cause, no matter how noble, but, at least, the option is there.
At this point, it’s important to make the following disclaimer: If you come in with less than a 20 percent down payment, many lenders -- who have relationships with Fannie Mae, Freddie Mac and other government agencies and investors to whom they sell their loans to generate cash so they can make more loans -- will require that you have some skin in the game. In other words, your down payment can’t come entirely from a gift.
However, if you come in with more than 20 percent, your entire down payment contribution could come from a gift.
Co-Signers to the rescue
Moving on, you could also ask mom and dad to co-sign the mortgage with you. If they have a solid credit score and assets, your ability to obtain a mortgage would increase significantly. About a quarter of all loan originations on single-family homes occur this way. In Los Angeles, co-borrowers listed on the mortgage or deed of trust recently topped 30 percent. Of course, if you miss a payment, your co-signers’ credit could be dinged, or, worse, if the mortgage payments stop altogether, the lender will come looking for mom and dad or whoever else you persuaded to cosign.
If there are no family or friends with deep pockets to help you out, reach into your own pockets. Consider pulling from your 401(k) or IRA assets. Some 401(k) plans let you borrow up to the lesser of $50,000 or 50 percent of your 401(k) balance. Raiding your retirement fund might slow your accumulation of retirement assets, so, again, you have to establish your priorities and ask yourself, am I willing to take a hit against my retirement savings to obtain a house now. After all, even though many 401(k) plans require that you pay yourself back, the time your money is absent from your account is time your retirement savings won’t be growing.
First-time homebuyers (and that usually means you haven’t owned a house in the last three years) can also tap an IRA up to $10,000 without early withdrawal penalties.
If none of the above options are available to you, or you just don’t want to go there — meaning you don’t want to hit up your parents or temporarily derail your retirement progress — you might turn to government programs for help. Many federal, state and local programs offer grants or special loans to help you come up with the down payment.
And if you’re planning your marriage, there’s no shame to start a “wedding registry,” where you indicate, not so subtly, that cash is even more welcomed than blenders and bedsheets.
So, if you want a house, you’re going to have to scrape together your nickels and dimes the way previous generations did — and perhaps work even a little harder than they did — but you also have new avenues that didn’t exist a generation ago to help you become a homeowner.
There’s no glossing over all the obstacles, real and imagined, that first-time homebuyers face, but with persistence and a solid plan of attack, you can do it.
Talk to a reputable lender experienced in successfully dealing with a multitude of financial scenarios about your goal to become a homeowner. Also, consult your accountant, tax adviser or mortgage lender for the most current tax rules, laws, strategies and tactics that may apply to your situation.
It doesn’t cost a penny to talk to a knowledgeable knowledge lender, so use your resources.
Lastly remember, if you have the will, you’ll find the way!