First-time homebuyers traditionally have relied on parents and grandparents to help with the down payment and closing costs. But today, many older people aren't in a financial position to offer such assistance to younger family members.
So how can would-be buyers afford their first house or condominium on their own? For many, the answer involves a combination of personal savings, a low-down payment loan with mortgage insurance, seller-paid closing costs or a first-time homebuyer down payment assistance program.
Stock and savings
Dan Nainan, a comedian and voice-over actor in New York, used cashed-in corporate stock options and personal savings to buy a 750-square-foot co-op apartment in Manhattan this year.
About half of his $85,000 down payment and closing costs came from stock options he sold five years ago. The rest came from a lifestyle that he says includes a lot of library books and dining-out coupons, but no cars, cocktail hours or cable television.
"It's important to live well," he says, "but also watch your expenses. It's possible to do both."
Nainan, 29, says he never expected homebuying help from his parents and while the prospect of buying a home was "somewhat daunting," he still felt confident of his ability to achieve his goal.
"I had to pay for my own college by myself, and I had to pay for my first car," he says. "A lot of my friends -- their car was paid for, their college was paid for and their home was paid for, but my dad has always stressed for my sister and myself to do things independently."
Down payment help
Homebuyers who aren't in a position to save tens of thousands of dollars typically turn to loan programs that allow a small down payment relative to the home's purchase price.
A loan insured by the Federal Housing Administration, known as an FHA loan, requires a down payment of only 3.5 percent. Granted, 3.5 percent isn't zero percent, but it's a relatively modest sum compared with the property's value and can be affordable in a low-cost housing market. All FHA loans involve extra costs for mortgage insurance, which protects the lender if the borrower defaults on the loan.
Private mortgage insurance, called PMI, also allows buyers to buy a home with a small down payment. Today, a loan with PMI might even be cheaper than an FHA loan, according to Jay Dacey, a mortgage broker at Metropolitan Financial Mortgage Co. in Minneapolis. PMI can be paid monthly or wrapped into a higher interest rate.
Or PMI can be financed as part of the loan amount. Dacey cites a hypothetical example of a $4,000 premium added to the loan. "Say you borrowed $200,000," Dacey says. "That extra $4,000 (for PMI) will wind up on the loan side, so that's $204,000. That's why it's called a 'single-financed.' And then, you never have to pay a monthly mortgage insurance premium."