President Joe Biden’s proposed $15,000 tax credit for first-time buyers would make homeownership affordable for 9.3 million, or 27.4%, of renters. The tax credit would be enough to fully cover a minimum down payment in the majority of the country’s largest metro areas, according to Zillow. Zillow notes that renters spend more of their income on rent than homeowners do on their mortgages. Additionally, the tax credit could create wealth for millions, which would benefit renters and future generations. Coughing up a down payment remains one of the largest barriers to homeownership, with two-thirds of renters reporting down payments as their main struggle.
The challenge is especially acute in the face of rapidly rising home values — a boon to homeowners, but a burden for those trying to save enough to hit a target today that may be inadequate tomorrow as prices keep rising. In light of these challenges, ideas have been floated around the introduction of legislation that would create a refundable, advanceable tax credit of up to $15,000 for first time homebuyers, similar to first-time homebuyer credits approved by Congress during the Great Recession. Unlike those credits, the recently proposed advanceable tax credit could be used at the time of purchase, which could jumpstart potential homebuyers lacking in down payment savings.
Affordability, in Need of Savings
Underscoring the importance of down payment assistance is the fact that a large share of renters across many major U.S. metros could, at least on paper, already reasonably afford the typical monthly mortgage payment on a home in their metro. Assuming a 3.5% down payment — the minimum required for an FHA-insured mortgage — on a 30-year, fixed-rate mortgage at 3% interest, about 9.3 million renter households (27.4%) nationwide could cover the monthly payment for the median home sold in their metro in 2020 without spending more than 30% of their income (above which a household is considered “housing cost burdened”).