Amounts for Different Down Payment Sizes

Most people know that the real estate market in Seattle has become very expensive. This is something that’s known throughout the country, in fact. Seattle has taken a place among the most expensive real estate markets in the U.S., alongside places such as New York City, San Francisco, and Los Angeles. But, though most people have a general idea of how expensive Seattle can be, few have a sense of what sort of financial capability is required to break into the Seattle real estate market. This is true not just for laypeople, but for brokers, agents, and other industry professionals as well. If I were to poll 100 agents in the Greater Seattle region – which would be a very small sample from a very large group – I’d bet that no more than 4 or 5 could give me a close estimate of a 20% down payment on a median value home in Seattle proper. Real estate professionals may be known for certain skills, but mastery of numbers isn’t necessarily among them.

In this post, we want to give a clearer idea of what it will take to break into the Seattle market at this point in time. Currently, a median value home in Seattle is $713,100. That’s a good chunk of cash. A median represents the middle point in a group of data; so that means that a home valued at $1 dollar more will be in the top half of homes in Seattle. Few potential buyers have the resources to acquire a median value home in Seattle without outside financing. And, in the vast majority of cases, this means that a down payment of some size will be required. Let’s take a look at a couple of different down payment sizes for median value homes in Seattle. This will give you a better idea of the sort of financial capabilities required to obtain financing for a Seattle home. Let’s crunch the numbers.

Down Payment Size: 3%

Let’s suppose that a buyer wants to finance a Seattle home (of median value $713,100) and put down 3%. This may be possible with either a government-backed loan (such as a VA loan, for instance) or a conventional loan, depending on the specifics. If a buyer puts down 3%, this means a down payment of $21,393. Back in 2018, the median household income (which may involve multiple earners) in Seattle was approximately $93,000. If we consider the $93,000 in the form of a single salary, we can see that a median income Seattle household will take home a bit less than $72,000 over the course of an entire year. This is because a salary of $93,000 in Washington State translates to a monthly take home pay of roughly $6,000, rounded up.

Putting down $21,393 on a median Seattle salary doesn’t seem overly difficult. But, we have to remember that a smaller down payment translates to higher monthly mortgage payments. We have to factor in the higher mortgage payments when we think about the sort of financial capability necessary to buy a median value home. If we assume an interest rate of 4.125%, monthly payments on a mortgage loan of $691,707 would be somewhere around $4,516 per month. That figure includes other things aside from payments on the principal and interest, such as property taxes, PMI, and homeowner’s insurance. This is just the fixed monthly cost, that doesn’t include the other, non-predictable costs which come with owning a home, such as utilizes, renovation and maintenance.

When we consider everything, putting down 3% on a median value home is going to be a difficult proposition for a family in Seattle earning the median household income. In fact, we can pretty much say that this is beyond the financial capabilities of the typical, median income household in Seattle. Technically, it may be possible to stretch a budget to the point where the mortgage could be serviced – mind you, these numbers above are for a fixed-rate 30 year mortgage – but, I think most financial professionals would advise against a home of $713,100 given the financial capabilities of the buyer in this type of scenario.

Down Payment Size: 10%

Let’s consider another scenario. In this hypothetical situation, the buyer puts down 10% on a median value Seattle home. In this situation, the buyer will be looking at a considerably lower monthly payment, but will still need private mortgage insurance (at least in most cases). Putting down 10% on a median value home in Seattle translates to a sum of $71,310. That’s quite a step up from the sum required for a 3% down payment. And, it presents a much higher hurdle when we consider that the typical take home pay for a median income household in Seattle is roughly $72,000. Realistically, this means that a median earning family is going to have to save for at least a few years to afford the down payment. Saving 20% of take home pay is a realistic goal, and saving at this level is considered fairly thrifty.

Saving beyond 20% is usually not possible for most households. This means that a thrifty household will need to save for 5 years or so just to afford the down payment. If you think about it for a moment, this is pretty tough hurdle to meet. The household has to keep earning at the median level for a 5 year span; this means that the household doesn’t have any wiggle room to account for an emergency or significant financial setback, such as a job loss. In most cases, a typical family will face at least 1 serious setback over a 5 year span, and so in the majority of cases the typical family will need more than 5 years to save for the down payment.

Now, if we again assume an interest rate of 4.125%, our 10% down payment on a median value home in Seattle will translate to a monthly mortgage payment of approximately $4,253. This isn’t even too far below the payment with a 3% down payment, and in this case we’ve plunked down nearly $50,000 more up front! Again, the question becomes: can a family with a median household income realistically afford to service a 30 year fixed-rate mortgage on a median value home in Seattle while putting down 10%? As before, the answer is: technically, it may be possible, but it’s also probably not advisable in most cases. One scenario in which it might be advisable is a situation involving significant cash reserves. But those situations aren’t very common. And, even if a family has a sizable amount in savings – say, $40,000 – that whole sum can be eaten up fairly quickly if a big setback occurs. $40,000 couldn’t service the loan for 10 months if the family’s income dropped to zero, and we know that anything can happen in our modern economy. All of this raises interesting thoughts and perspectives on the current state of the Seattle market, and other expensive markets across the country. Check back soon and we will dive into this topic in more detail.

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