Millennials, the largest generation in US history, have been slower than previous generations to transition into homeownership, with a homeownership rate 8 percentage points lower than that of other generations at the same point in their lives.

This has resulted in 3.4 million fewer homeowners. But Urban Institute’s 2018 barriers to homeownership report shows that more than 19 million millennials in the 31 largest metropolitan statistical areas (MSAs) have the credit and income to purchase a home.

So what’s still holding them back? Persistent myths about down payments could be a significant part of the answer.

Where are millennials ready to buy homes?

Freddie Mac recently characterized millennials as “mortgage ready” if they are no older than 40, do not have a mortgage, and have strong enough credit to qualify for a mortgage (a FICO score of 620 or above, a debt-to-income ratio of 25 percent or less, and no recent foreclosures, bankruptcies, or serious delinquencies). 

They examined the 31 largest MSAs for affordability and mortgage readiness by race or ethnicity, with the full set of results contained in their recent report, Barriers to Homeownership. We note some interesting trends.

Expensive coastal cities have the highest shares of mortgage-ready millennials.

Chicago, Dallas, and Houston join Los Angeles and New York City as having the most millennials that are mortgage ready, and the highest share of mortgage-ready millennials (40 to 45 percent) are in coastal cities.

Of the five cities with the smallest mortgage-ready share, three are in the South, and two are in the Midwest, and in each one, no more than 30 percent of millennials are mortgage ready.

Some of the largest millennial populations face affordability challenges.

Cities like New York and Los Angeles have many mortgage-ready millennials, but houses there are less affordable. Most mortgage-ready millennials in the 31 cities can afford a home as well, which makes sense because those with good credit tend to have higher incomes.

But in New York City and Los Angeles, only 75 and 78 percent of mortgage-ready millennials, respectively, could afford the median-priced home. Compare this with Dallas and Houston where, 98 percent can afford the median-priced home.

Racial and ethnic gaps persist.

Black and Hispanic millennials are mortgage ready at lower rates than white millennials. On average, 34 percent of millennials are mortgage ready. But there are significant variations by race or ethnicity: 38 percent of white millennials are mortgage ready, compared with only 20 percent of black and 28 percent of Hispanic millennials in the 31 cities.

The figure below shows the share of mortgage-ready millennials in the Philadelphia area and what share of them can afford the median-priced home with a 10 percent down payment. The Philadelphia MSA falls in the middle of the pack of the 31 cities we examined, with 35 percent of the millennial population designated as mortgage ready.

While 40 percent of white millennials in Philadelphia are mortgage ready, only 19 percent of black millennials and 25 percent of Hispanic millennials are mortgage ready. The catchall race of “other,” which includes Asians and those who do not fit into the above categories, have the highest share of mortgage-ready millennials, at 52 percent.

Affordability for mortgage-ready millennials is high across all races and ethnicities. At 95 percent, Hispanics are the only category where less than 97 percent can afford the median-priced home, assuming a 10 percent down payment.

Persistent down payment myths may be interfering with millennial homeownership

Many millennials could qualify for a mortgage, and most of these qualified millennials have the income to afford a house, so the down payment may be the one remaining hurdle.

We know that most renters say saving for a down payment is an obstacle to homeownership and that most find it at least somewhat difficult to save for a down payment. At the same time, most think they need to put at least 15 percent down. But the median down payment in the US in 2017 was 5 percent.

And despite limited awareness, every state has programs that provide grants and loans to make homeownership more attainable, with average assistance in various states ranging from $2,436 to $21,171.

Urban Institute’s interactive map offers state-specific information on the number of down payment assistance programs, and their down payments quiz helps debunk down payment myths. 

Given that 19 million millennials have the credit profile and income to buy a home, it’s important to educate people that down payments are less of an obstacle to homeownership than they may think.