Four Barriers to Homeownership

By Lindsay Frankel
Inside Subprime: May 11, 2020

Homeownership is central to the American Dream because of the opportunity it provides for Americans to build wealth and achieve financial security. The average American spends 37 percent of their income on housing. Renters never get that money back, while homeowners build equity and have historically been able to look forward to a return on their investment; real estate prices rose an average of nearly 33 percent during the five-year period ending in 2019. 

Owning a home free and clear reduces monthly expenses and provides greater stability during retirement, making it an important milestone. But while owning a home can save you money in the long run, many Americans will struggle to afford the initial costs. There are several barriers preventing Americans from becoming first-time home buyers, and about half of Americans reported facing these challenges, which disproportionately impact low-income earners and racial minorities.

About 65 percent of Americans are homeowners, according to 2019 Census Bureau data. But there are huge gaps in homeownership rates between whites and minorities. While the homeownership rate for non-Hispanic white-alone households was 73.7 percent, only 48.1 percent of Hispanic households and 44 percent of black alone households owned their homes. 

The 2019 Consumer Financial Literacy Survey also found that about two thirds of blacks and 54 percent of Hispanics experienced barriers to homeownership, compared to only 44 percent of whites. 

There’s a divide between income groups as well. Nearly 79 percent of households with income equal to or greater than the median family income owned their homes, while only about half of households earning less than the median family income did. 

4 Barriers to Homeownership

Saving for a Downpayment

While the median value of owner-occupied housing units is just over $200,000 and most lenders require a 20 percent down payment to avoid private mortgage insurance, the average American only has $8,863 in liquid savings. And younger households, particularly single parents, have significantly less saved. 

According to the Urban Institute, the down payment was the most cited challenge to achieving homeownership, with 68 percent of respondents indicating that it was a barrier. 36 percent of respondents reported that it would be “very difficult” to save enough for a down payment. 

Low down payment mortgages have become more common since the Great Recession, with more Americans taking advantage of FHA loans and other programs. The loan-to-value ratio increased from 80 percent in 2006 to about 95 percent in 2017. Still, more than three quarters of Americans reported being “not too familiar” or “not at all familiar” with low down payment programs. Most non-owners believe you need to have at least 15 percent saved for a down payment. 

Difficulty Accessing Credit

Another challenge facing home buyers is the availability of a mortgage loan. Many prospective home buyers have credit scores that traditional lenders won’t accept. While debt-to-income standards have relaxed over the decade since the financial crisis, lenders have tightened credit score standards over the same period, and the median credit score for new home purchases went up 20 points to 738 in April of 2018. The average credit score in the U.S. is 703, but many Americans have lower scores than that, which preclude them for accessing a mortgage loan. Most subprime borrowers are taking out FHA loans, which have looser underwriting standards. 

In addition, there’s still evidence of redlining, with African American and Hispanic home buyers being denied loans from traditional lenders at much higher rates, especially in certain areas, according to a study of 31 million records. Black applicants were denied loans at higher rates than whites in 48 cities, and redlining against Latinos was found in 25 cities. These disparities were present even when controlling for income, neighborhood, and loan amount. 

Rising Home Values

Across the country, median rental costs are still higher than mortgage amounts. But interest rates and home values have increased over recent years, and the median share of income required to afford mortgage payments increased more than five percentage points over six years. In 2018, homeowners would need to devote a median of 23.3 percent of their income to monthly mortgage payments, and that’s after a 20 percent down payment. As property values increase, so will the required down payment and loan amount, making it more difficult for Americans to achieve homeownership. 

Poor Financial Literacy Skills

A mortgage is a complex agreement that requires basic financial skills for comprehension. Many Americans simply don’t have the financial skills needed to approach the homebuying process. The result is that financial literacy rates are higher among homeowners; while 55 percent of adults in major advanced economies are financial literate, 70 percent of homeowners in those countries are financially literate, according to the S&P Global FinLit Survey.

In addition to understanding the homebuying process, prospective homeowners need the financial savvy to be able save enough for a down payment and keep their credit healthy. These are basic prerequisites that many Americans aren’t able to meet because they lack the financial skills necessary. 

Fortunately, there are plenty of resources available to first-time homebuyers that can help them understand the process. There’s certainly a lot to learn, and it can take time to apply that knowledge to budgeting and saving habits. But it’s well worth the effort. A first home is a huge investment that requires a lot of financial planning, but owning a home can help individuals save money, build wealth, achieve financial security, and even pass down wealth to future generations. 

For more information on the middle income consumer, subprime loans and payday loans, see our city and state financial guides including states and cities like California, Texas, Illinois and more.