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Commentary

First-time homebuyers often think that homes like this one in Los Angeles are out of reach because of the large down payment. Not so, says RE/MAX CEO Dave Liniger. (AP)

Even though the economy is in a slow-motion recovery, the real estate market is moving at full speed. Existing-home sales in May ran more than 5% ahead of last year, which itself was already the best year for sales in a decade.
However, one group of Americans is notably absent from this measure of the American dream: first-time home buyers. Historically, first-timers have made up 40% of all home buyers. But in all of 2015 they accounted for merely 30%.

With the many benefits of home ownership, why the hesitation?

The answer often boils down to a lack of information. Many potential first-time buyers continue renting because they assume home ownership is only for the wealthy, those who can afford a hefty 20% down payment. They feel in their gut what economists have verified — that saving for 20% down on an average home with an average income could take a decade or more.

Here’s what these aspiring but frustrated potential buyers don’t know: the 20% down payment requirement is a myth. Mortgages for as little as 3% down are readily available.

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Still, 73% of millennials have little or no awareness of such finance options. Last year, as many as a half a million potential first-timers may have delayed home buying because of what’s in their heads, not what’s in their wallets.

Most first-time buyers belong to the millennial generation, those in the 19-35 age group. The formative experience of their youth was the great recession, with its devastating foreclosure debacle.

They’re graduating from college with a record amount of student debt and entering the workforce only to find limited opportunity and stagnant wage growth. It’s not surprising that they are getting married and having children later than previous generations. Although repeated surveys reveal that they aspire to own a home, they’re largely unaware of mortgages designed specifically for them.

The Federal Housing Authority has supported mortgages with just 3.5% down for decades and has traditionally been the mortgage of choice for most first-time home buyers. As a direct result of the great recession, lending standards became overly restrictive — but they are now much more reasonable. In 2014, Fannie Mae and Freddie Mac both began guaranteeing mortgages with down payments as low as 3%, which are available through responsible lenders nationwide.

Like all mortgages, low down-payment programs still require good credit and verifiable income, and they may impose additional requirements such as mortgage insurance. But when combined with near historic lows in interest rates, such mortgages represent an attractive opportunity for first-time home buyers.

What’s more, rents have been escalating faster than home prices. The percentage of an average income needed for rent often exceeds that needed for a mortgage payment. Depending on individual financial circumstances, a low-down payment mortgage could actually improve monthly cash flow for many buyers.

Those pondering the prospect of home ownership should understand that mortgage interest, property taxes, and some closing costs are all deductible and can significantly reduce one’s tax bill. But there are a number of lesser known advantages that warrant as much — if not more — consideration.

For many Americans, home ownership is the single greatest contributor to building wealth. The net worth of homeowners is far greater than that of renters — a truth that persisted even through the financial crisis. Additionally, home ownership creates a stronger bond to the neighborhood and is a good predictor of positive outcomes for children. Indeed, children of homeowners are much more likely to finish high school.

Unfortunately, the mistaken belief that a large down payment is required to buy a home is preventing many who are creditworthy from enjoying the benefits of home ownership. In reality, today’s real estate market is very receptive to first-time buyers. Millennials may be facing many challenges and uncertainties, but getting into a home of their own needn’t be one of them.

Liniger is the CEO, chairman, and co-founder of RE/MAX.
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