Two tenants stand in front of their new home, which they are renting from Roots, a program that helps tenants invest in real estate.
Courtesy of: Katie Curran
When Will Hunnicutt was looking for an apartment in Atlanta earlier this year, expensive rents and rejections left him feeling defeated.
“Three-and-a-half times the income-to-rent ratio is hard to achieve when they want $3,000 in a lot of places,” said the 30-year-old social worker.
Then Honeycutt found a two-bedroom apartment for $1,050 a month linked to Roots, an Atlanta-area real estate investment company that helps tenants of properties in its portfolio build the wealth needed to own a home. He put his $1,000 security deposit into the investment company, and has earned another $200 in quarterly rebates so far for taking care of his unit and paying rent on time.
“The ultimate goal is to buy a house, so having mutual funds, which is passive income, will be very helpful,” Honeycutt said.
Will Hunnicutt with his dog Billy in his Atlanta home he rents through Roots, a company that helps renters build wealth through real estate investing.
Courtesy of: Will Hunnicutt
Roots is currently only available in Atlanta, but plans to expand this fall. It’s just one approach to a broader goal: helping consumers financially prepare to buy a home.
As buyers continue to struggle to afford home purchases, experts say programs that help with down payments may be worth another look.
The dream of owning a home has become out of reach for many as home prices rise. According to the National Brokerage Site, aspiring homebuyers need to make $113,520 a year to afford a typical American home. Redfin – 35% more than the average family income annually.
One barrier to homeownership is having enough savings for a down payment. Nearly 40% of Americans who don’t own a home say they don’t have enough savings for a down payment, according to a 2023 CNBC/SurveyMonkey poll. More than 4,300 U.S. adults were surveyed in late August for the report.
“Thousands of first-batch assistance programs”
Down payment assistance programs come in a variety of forms, and from a variety of sources — including government agencies, cities, nonprofits, financial institutions, and mortgage lenders. So you'll need to do your research to find out what's available in your area.
Assistance programs typically focus on first-time homebuyers and buyers who meet certain income qualifications. There are also programs that focus on “first-generation homebuyers.”
In many down payment assistance programs, participants are required to attend a homebuyer education course. Depending on the program, they may also have to meet other requirements, such as getting their mortgage through a specific lender or saving a certain amount to contribute toward their home purchase.
The assistance can be substantial. For example, Alternatives Federal Credit Union in Ithaca, New York, has programs that offer up to $9,000 to $20,000. The Chicago Housing Authority can offer up to $20,000 in assistance.
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Housing experts say this type of program is one way to work toward home equity, as systemic barriers still block the path to homeownership for many Americans.
This is especially true for Black Americans, who have largely been on the receiving end of decades of racial discrimination, exclusionary zoning, and predatory lending, according to Nikkitra Bailey, executive vice president of the National Fair Housing Alliance.
Programs targeting first-generation homebuyers are particularly important, she said. While it's common for families to help with the down payment, prospective buyers whose parents rent are less able to provide that assistance.
“We know that there are thousands of first-generation assistance programs that cities have adopted,” but their reach among “disadvantaged consumers of color” is limited, Bailey said. “That’s why ‘first-generation’ is so important, because it’s a racially neutral way to target resources to consumers on whom the future health of the housing system depends.”
How much do you need for down payment?
One reason making a down payment can be so difficult is that buyers often think they have to put down 20 percent of the home's purchase price. Experts say they're wrong.
A survey by the National Association of Realtors based on transactions from July 2022 to June 2023 found that first-time homebuyers typically put down 8%. Some loans require even less, as low as 3.5% or even 0% down.
Keep in mind that putting down less than 20% typically means you’ll have to pay private mortgage insurance, or PMI. PMI can cost anywhere from 0.5% to 1.5% of the loan amount per year, depending on various factors, according to Mortgage Reports. Typically, you can ask to have mortgage insurance removed after you reach 20% equity.
“These dollars should not be invested in the market.”
First-time homebuyers may be able to withdraw up to $10,000 without penalty from a 401(k) plan or traditional or Roth IRA. But financial advisors recommend keeping that money for retirement when possible.
While Roots may help tenants invest to build wealth, experts typically emphasize saving rather than investing for short-term goals.
Low-risk options, including high-yield savings accounts, certificates of deposit, or Treasury bonds, may be ideal for people with a purchase term of up to five years.
“Anything you need dollars for in the next three to five years, you shouldn’t be investing those dollars in the market,” said Janet Stanczak, a certified financial advisor and founder of Minnesota-based Financial Empowerment. “Markets typically cycle in three- to five-year cycles, and at worst you might find a house you want to move into and put your money in the market and then the market goes down.”
