Where you live can make a big difference: The amount needed for a 5% down payment ranges from about $10,400 in Iowa to roughly $42,000 in Hawaii.
Higher incomes don't always mean easier homebuying: High housing costs, taxes and limited inventory can offset the benefits of earning more.
You may not need 20% down: First-time homebuyer programs and private mortgage insurance can help make homeownership more attainable with a smaller down payment.
Saving for a home can feel like a moving target, especially when housing costs, taxes and everyday expenses are all competing for a spot in your budget. And where you live may make a bigger difference than you realize.
A new study from BadCredit.org ranks all 50 states and Washington, D.C., based on how easily residents can save for a down payment, taking factors such as income, housing costs, taxes and the job market into account.
ConsumerAffairs spoke with Erica Sandberg, a consumer finance expert at BadCredit.org, who explained what these rankings can tell prospective homebuyers and why a higher income doesn't necessarily make it easier to save for a down payment.
The biggest findings
The study found that the states where residents have the easiest time saving for a down payment tend to strike a balance between higher incomes and more manageable housing costs. Maryland ranked No. 1 overall, followed by South Dakota, Virginia, New Hampshire and Iowa.
The gap becomes especially clear when looking at the amount needed for a 5% down payment. In Iowa, where the median home value is $208,000, that would come to about $10,400. In Hawaii, where the median home value is $839,100, the same 5% down payment would be roughly $42,000 — a difference of more than $30,000. The study also found that the home price-to-income ratio ranges from 2.77 in Iowa to 8.36 in Hawaii.
At the other end of the rankings, New York, California, and Hawaii were among the least affordable states for aspiring homeowners. While residents in these states can earn relatively high incomes, those earnings can be eaten up by high home prices, taxes, and overall living costs, making it harder to put money aside for a down payment.
What contributes to higher costs?
Sandberg explained that there are several factors that come into play when it comes to affording a down payment.
“That Maryland garnered the top spot in our study shows the importance of economic balance,” she said. “The concept of home purchase affordability goes beyond price. The cost needs to fit neatly with income, which is where this state comes out ahead.
“When average residents earn salaries that make it easy to save for a down payment and then meet the monthly mortgage payment, they’re in a great position to purchase.”
However, on the opposite end of the spectrum, in states like New York, California, and Hawaii, housing inventory plays a big role.
“Intense demand pushes prices upward,” Sandberg said.
“State specific tax and policy issues can magnify the problem. For example, there is a battle over Proposition 13 in California, which discourages people from selling their property because it resets the assessed value to the most current purchase price. Whether this is positive or negative is up for debate, but it almost certainly affected inventory.”
Is homeownership attainable?
For consumers living in states with high price-to-income ratios, homeownership may not feel attainable. Sandberg offered her best advice for consumers in these states.
“Not everybody blooms where planted,” she said. “For some, their community is extremely important, so they are willing to stick it out despite the extreme expense. In that case, recognize the trade-offs. Instead of a spacious home with a big yard in South Dakota, you may be happier in a small condo in Maui – for now.”
Sandberg also recommends that consumers start planning today, and pursue federal and local assistance programs that can help you purchase.
“Every state in the U.S. has a first time homebuyer program that allows you to buy without a big down payment,” she said. “If your income fits the threshold, you may have the opportunity to buy a home for below market rate. Even if you don't qualify for such programs, you can still purchase a home without having to put 20% down by getting private mortgage insurance to make up the difference.”
More advice: Build and maintain your credit rating.
“The higher your credit scores are, the less expensive your home loan will be,” Sandberg said. “Commit now to making all of your payments on time, and pay off your credit card balances in full every month. Not only will this strategy improve your credit, you’ll avoid paying interest, leaving you more money to save for the down payment.”