Young Adults Applying to Mom-and-Dad Bank for Down Payment Help
By Adam Korengold | June 2, 2016
Weighed down by the need to pay off student loans or perhaps other debt, young adults may be hesitant to enter the home-buying process. But homeownership is still one of their dreams.
And even when debt is not an issue, young prospective buyers often perceive saving for a down payment as a problem. As previously reported, they often overestimate how much money they will need. On a Fannie Mae loan, it can be as little as 3 percent of the purchase price.
Today’s young adults are taking longer to leave their parents’ nest. But that does not seem to have diminished their hopes of becoming homeowners. Fannie Mae staff wanted to find out what kind of assistance young adults may be receiving from their parents, and the impact that assistance may be having on their likelihood of attaining homeownership.
A study by Dowell Myers, Gary Painter, and Julie Zissimopoulos of the University of Southern California provides some answers. Myers’ 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?
Sizable monetary transfers from parents to children between the ages of 20 and 49 are not that 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. The authors defined this 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 then for older children ages 25 to 49. This may be because younger children are more likely to still be in college and the parents likely intended the transfers to cover education expenses. Not surprisingly, parents with household incomes in the top 25 percent of the wealth distribution were more than twice as likely to make transfers to their adult children as those in the bottom 75 percent.
What impact do transfers have on home buying?
This is the larger question: Do parental transfers actually enable more adult children to become homeowners? Not surprisingly, Myers’ team found that – for the data set covering earlier years – children who received transfers above the study threshold of $5,000 over two years were indeed more likely to transition to homeownership. (The other data set did not show this impact, maybe due to its much smaller sample size or to unique aspects of the housing and mortgage markets and the overall economy during the covered period.)
There are two interesting dynamics at play:
- Younger children between the ages of 20 and 24 were no more likely to become homeowners after the transfer than children of the same age who did not receive a transfer. This might indicate that the transfer was for educational expenses.
- Children of parents who had less than a high school education were more likely to become homeowners following the transfer than children of parents who had college educations – assuming that the parents in both groups had the same income and wealth.
For Myers, the results call for enhancing the access of qualified young buyers to mortgages.
“Children who come from families below the top 25 percent of wealth background are less advantaged in home buying,” he says. “To create broader access, and expand the market for home purchases, we can't just rely on those wealthy parents. Clearly, the nation is benefitted by lowering the hurdles of high down payment or other obstacles that may hinder the home purchases by the other 75 percent.”
How can lenders help?
Many young homebuyers aren’t aware of programs like Fannie Mae’s Home Ready® mortgage, which allows qualified borrowers to put as little as 3 percent down. That down payment can come from any source – including gifts from relatives or grants.
Additionally, resources like the HOME by Fannie Mae™ mobile application can help first-time buyers navigate the process of shopping for a home and a mortgage.
These tools can help make young adults better informed and better prepared to purchase a home that suits their lifestyle and their budget – and that allows them to flex their wings and fly out of their parents’ nest.
Adam Korengold is a research analyst with Fannie Mae’s corporate communications team.