Young Adults Turning to Mom and Dad for Down Payment Help
As The Home Story has discussed recently, while young adults are understandably hesitant to enter the homebuying process — feeling weighted down by the need to pay down student loans or other debt perhaps — homeownership is still one of their dreams.
But even with debt in hand, they often consider saving for a down payment as problematic. As previously reported, homebuyers often overestimate the amount required for a down payment — which on a Fannie Mae loan can be as little as 3 percent of the purchase price.
As young adults take longer to leave their parents’ nest, their hopes of homeownership do not seem to diminish. Fannie Mae staff wanted to know what kind of assistance young adults may receive from their parents and how that assistance impacts their likelihood of becoming homeowners.
A study by Dowell Myers, Gary Painter, and Julie Zissimopoulos of the University of Southern California provides some answers. Myers’s team analyzed two sets of data containing information on family income dynamics, including monetary transfers from parents to children, from 1998 to 2004, and again during 2012 to 2013. Their findings answer two important questions.
How Common Are Transfers From Parents to Adult Children?
Transfers, especially sizable ones, from parents to children between the ages of 20 and 49 are not very common. Only about 6 percent of these adult children who were not already homeowners received a transfer from their parents large enough to contribute substantially to a down payment (defined by the authors as transfers of $2,500 or more in a single year in one data set, and transfers of $5,000 or more over a two-year period in the other data set).
According to the data from one set, transfers were more likely for younger adult children (ages 20 to 24) than older children (ages 25 to 49), which may be because younger children are more likely to still be in college and the transfers were likely intended to cover education expenses. Not surprisingly, transfers were also more than twice as likely for parents in the top 25 percent of the wealth distribution as for parents in the bottom 75 percent.
How Do Transfers Impact Homebuying?
This is the larger question: Do parental transfers actually result in more adult children being able to become homeowners? Not surprisingly, Myers’s team found that, for the data set covering earlier years, children who receive transfers above the studied threshold ($5,000 over two years ) are indeed more likely to transition to homeownership. (The other data set did not show this impact, but this may have been due to that data set’s much smaller sample size or to unique aspects of the housing and mortgage markets and the overall economy during the period covered.) There are two interesting dynamics at play:
- Younger children — between the ages of 20 and 24 — are no more likely to become homeowners after the transfer than children of the same age who did not receive a transfer, which might indicate the transfer is for educational expenses.
- Children of parents who have less than a high school education are more likely to become homeowners following a transfer than children of parents who are college educated — assuming that the parents in both groups have the same income and wealth.
For Myers, the results call for enhancing access to mortgages for qualified young buyers: “Children who come from families below the top 25 percent of wealth background are less advantaged in homebuying. To create broader access, and expand the market for home purchases, we can’t just rely on those wealthy parents. Clearly, the nation is benefited by lowering the hurdles of high down payment or other obstacles that may hinder the home purchases by the other 75 percent,” he says.
How Can Lenders Help?
Many young homebuyers aren’t aware of programs like Fannie Mae’s HomeReady® mortgage, which allows qualified borrowers to put as little as 3 percent down, and that down payment can come from any source, including gifts from relatives or grants.
Additionally, resources such as the HOME by Fannie MaeTM mobile application can help first-time buyers navigate the process to shop not only for a home but for a mortgage.
These tools will help young adults be better informed and better prepared to make a purchase that suits their lifestyle and their budget and, as young adults often hope, to flex their wings and fly out of their parents’ nest.
Estimates, forecasts, and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current, or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR Group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.