Falling Affordability
The housing market has become increasingly challenging for buyers in recent years. Intense competition and limited inventory drove prices higher, making it tougher for buyers to afford homes. As affordability declined, fewer borrowers could save enough for a down payment than in pre-pandemic years. In 2022, nearly 40% of prospective borrowers couldn’t manage a 5% down payment, according to The Mortgage Reports. We explored the reasons behind this rapid drop in affordability and how you can secure a loan with flexible down payment options.
Fewer Buyers Able to Afford a 5% Down Payment
Exclusive survey data from TheMortgageReports.com reveals that in 2022, 39% of prospective home buyers were unable to make at least a 5% down payment, up from 33% in 2019. The past few years saw unprecedented home price increases, fueled by an extreme supply-demand imbalance and the shift to remote work, which changed where people chose to live and buy homes. Combined with rising inflation and increasing mortgage rates over the last year, these factors made saving for larger down payments more challenging.
“Economic uncertainty and the Federal Reserve’s monetary easing in response to the pandemic brought mortgage rates to record lows, significantly increasing consumers’ buying power,” explained Ksenia Potapov, an economist at First American.
“From February to December 2020, home buyers gained an estimated $50,500 in purchasing power, which outweighed rising home prices. However, as mortgage rates began to climb, buying power diminished, and affordability dropped by 78% between January 2021 and December 2022,” she added.
Thankfully, the traditional requirement of a 20% down payment is largely outdated. Today’s buyers—especially first-time homeowners—benefit from a broader selection of loan options tailored to their needs, along with programs that assist with down payments.
How the Pandemic Transformed Housing Costs
The Covid-19 pandemic led to significant changes in home-buying trends, with effects that continue to influence the market.
Remote work eliminated the need for many people to live near their workplaces, prompting a mass movement away from crowded urban centers to areas with more spacious, affordable properties. This surge in demand flooded local markets, further straining an already limited supply of available homes.
“To support the economy amid fears of a deep recession due to COVID-19, the Federal Reserve kept the Fed Funds rates low and invested billions in mortgage-backed securities through quantitative easing,” explained Rick Sharga, CEO of CJ Patrick Company. “This resulted in historically low mortgage rates, driving demand higher just as the inventory of homes for sale reached record lows.”
The sharp increase in demand alongside scarce listings led to bidding wars, pushing property values to new heights. Homeowners benefited as their equity surged, while prospective buyers faced intense competition and went to great lengths to secure homes.
Nationally, home prices rose by 18% in December 2021 compared to December 2020, according to the Federal Housing Finance Agency (FHFA). This growth rate nearly tripled the top-end rates of a typical market, where annual appreciation ranged between 4.89% and 6.8% from early 2017 through mid-2020.
Housing prices surged during the pandemic as remote work and other factors reshaped Americans’ living preferences,” noted Eddie Seiler, AVP of housing economics at the Mortgage Bankers Association (MBA) and executive director of the Research Institute for Housing America. “Low interest rates helped offset some of the steep price increases by keeping monthly payments more manageable.
2022 Housing Market Statistics
The housing market saw a rapid increase in property values due to the impact of Covid-19.
The U.S. median home price rose from $274,600 in 2019 to $300,200 in 2020, then to $357,100 in 2021, and reached $392,800 in 2022, according to the National Association of Realtors (NAR).
While the median home price dropped to $363,100 in January 2023, Sharga noted that this could signal a home price correction, as affordability has been affected by rising mortgage rates.
Saving for a down payment remains one of the biggest challenges for renters aspiring to become homeowners. Part of this challenge stems from the outdated belief that a 20% down payment is required. In reality, down payment amounts vary significantly depending on the loan type and borrower.
In 2022, the median down payment for home buyers was 13%, according to NAR. However, for borrowers aged 23 to 31, this median was as low as 8%. Only buyers older than 57, who have had more time to save and may have access to home equity, typically put down more than 20%.
The median also differed for first-time buyers, who typically made a 6% down payment in 2022, compared to repeat buyers who put down 17%.
Home Loans for Buyers Unable to Make a 5% Down Payment
If you’re having trouble saving for a down payment, you’re not alone. There are numerous lending and assistance programs designed to help.
Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), offer low down payment loans—HomeReady and Home Possible—that require just 3% down and feature more flexible underwriting criteria. Additionally, the Conventional 97 loan allows borrowers to put down as little as 3%.
Mortgages insured by the Federal Housing Administration (FHA) are popular choices for first-time and lower-income buyers, requiring just a 3.5% down payment. For 2023, the FHA also reduced borrower costs. According to NAR data, FHA loans accounted for 15% of all mortgages in 2022.
Military veterans have access to loans backed by the Department of Veterans Affairs (VA), which typically offer lower interest rates and require no down payment. In 2022, VA loans made up 9% of all mortgages, according to NAR. USDA loans, backed by the Department of Agriculture, are designed for low- and moderate-income borrowers in rural areas and also don’t require a down payment.
Some private lenders also offer zero-down mortgages, but these come with specific guidelines and qualifications.
It’s important to remember that loans with smaller down payments often require private mortgage insurance (PMI), which can be removed once you reach 80% of your home’s loan-to-value ratio.
In addition, down payment assistance programs offer grants or upfront loans to help with the purchase. These programs vary by state, with over 2,000 available nationwide.
Some companies offer supplemental cash at closing in exchange for a share of your home’s future equity. However, Sharga cautions borrowers about “shared equity” programs, noting that they are not heavily regulated and that borrowers should carefully review and fully understand the terms before signing up.
Advice for Home Buyers
Housing affordability has significantly decreased in recent years, and fewer potential buyers can afford a 5% down payment compared to pre-pandemic times. Fortunately, there are many mortgage options and assistance programs available to help.
“As we’re seeing now, there’s an increase in down payment assistance programs both nationally and locally, designed to help new homeowners bridge the income gap and cover the shortfall in available funds for down payments,” said Ralph DiBugnara, president of Home Qualified. “These programs work alongside Fannie Mae, Freddie Mac, and FHA loans to provide buyers with low- or no-down payment options.”
When you’re ready to start your home buying process, it’s a good idea to consult with a local mortgage lender to explore your options.