A Growing Surplus of Homes Opens a Window for Down Payment Accumulation

Prospective homeowners now have a window to assemble down payment funds as the housing market cools. Sellers outnumber buyers by more than 600,000 nationwide. This surplus has caused home prices to settle into a more affordable and sustainable range, including price drops over the last 12 months in over half of the nation's top 50 metro areas.

Accumulating a 20% down payment remains the gold standard to avoid private mortgage insurance and secure better loan terms. For those who qualify as low- to moderate-income borrowers, options include USDA and VA loans at 0% down, FHA loans at 3.5% down, and conventional loans such as Fannie Mae HomeReady and Freddie Mac Home Possible at 3% down. To keep these funds liquid and low-risk for a near-term purchase, funds are often held in high-yield savings accounts.

Improving a credit score during this accumulation phase lowers the mortgage rates offered to the borrower. For a 30-year fixed mortgage, a borrower with a 620 credit score may expect a rate of 7.17%, while a borrower with a 740 score typically receives a rate of 6.4%. The difference between these two rates results in costs in the tens of thousands of dollars.