How to Actually Afford Buying a Home in Todays’ Market
Homebuyers today face tough challenges; housing prices are at their highest point in years, your income doesn’t seem to go as far as it once did and expensive rent has become the rule, not the exception. How can people today overcome these obstacles to make such a large purchase? When it comes to financing, today’s buyers are finding ways to achieve homeownership with a little creativity, more flexibility and some education. The “right time” to buy a home is different for everyone, but budget is often a leading factor. At OGI Mortgage Bankers, we’re experts in helping you find the right mortgage to fit your own personal budget. We have tools and lending professionals dedicated to leading you through the process to make sure you can make the best decisions for your future.
Know All of Your Options (and Credit Score)
According to a 2017 Fannie Mae working paper, “How Much Do U.S. Households Know About Qualifying for a Mortgage?”, many Americans don’t have even basic, understanding of what it takes financially to buy a home, or if they meet the basic requirements. As you begin the home buying process, it’s important to know what resources are available and how to use them.
The first priority when trying to determine if you can afford a home is figuring out what financing options are available and what mortgages you’re actually eligible for. Subsequently, you will also determine much you will need for a down payment and how much you can afford. Fannie Mae discovered that most consumers don’t know the first thing about qualifying for a loan; and the minimum FICO score required by lenders was a mystery. The survey also found that only 51 percent of consumers even knew what their credit score was.
About 40 percent of consumers are unsure of the lender requirement for the minimum down payment; plus, three-quarters of consumers don’t know anything about loan programs that have been set in place to help with down payment troubles, like FHA loans. Before consumers start thinking about saving for a home, they should know, and understand, what their financial resources are and if they’re currently eligible to buy.
Can You Qualify for a Mortgage?
The first question we can help you answer is if you qualify for a mortgage. One of the key factors in determining this is your debt-to-income ratio. For example, if a loan program uses a 28/36 qualifying ratio, this means you are allowed to spend no more than 28% of your gross (pre-tax) income on monthly mortgage payments and no more than 36% on total debt. Total debt includes car and school loans, credit cards, child support and alimony. So, if you earn $60,000 per year, your monthly gross income is $5,000. Under the 28/36 guidelines, your maximum monthly mortgage payment should not exceed $1,400 while your total monthly debt should not exceed $1,800.
Know Your Deal Breakers, but be Flexible
In order to get into their first home, some buyers are considering homes and locations outside of their initial wish list, and have been increasingly flexible when it comes to the type and size of home, the neighborhood, and the overall condition of the home.
Although single-family homes remain a dream for most looking for a home, buyers in today’s economy will consider buying condos and townhomes, to secure a home in their ideal location. Buyers with household incomes under $50,000 are more likely to consider homes outside of the traditional single-family residence (40 percent), compared to those with incomes of $50,000 or above (24 percent). People seem to get discouraged when they look in their target neighborhood and they see homes around $500,000 when they’re looking for a $300,000 home.
Affordably priced homes do, in fact, exist; but in popular areas, where people most often want to live, it’s going to be difficult find them. If you’re willing to consider a couple of tradeoffs, make a longer commute and re-consider your priorities, you may be able to find a suitable home that might be a little cheaper and far more affordable.
How Much Home Can You Afford?
Next, you’ll need to calculate how much you can afford. For example, how much of a down payment are you prepared to make? Commonly paid in cash, the down payment is based on a percentage of the home’s selling price and is due at closing. Making a down payment of 20% or more can save you money and enable you to avoid the cost of mortgage insurance. If you are unable to make a 20% down payment, many other affordable mortgage programs exist.
Make Enough Money to Be Able to Save
With fewer resources to pull from than their older, wealthier counterparts, renters wanting to buy a home face tough financial headwinds. According to the “Zillow Group Consumer Housing Trends Report 2017”, renter households typically earn a median income of $37,500 annually. Households who recently bought a home have a median household income of $87,500 annually. While there are ways to enter into homeownership without making $87,500 in household income, it’s hard to afford to buy if you make significantly less.
Only 29 percent of Americans make $87,500 or more, per U.S. Census Bureau, American Community Survey 2016 data. For perspective, only one of the top 10 most common jobs in the United States carries a salary above $37,500, meaning the jobs that the majority of Americans hold, fast food workers, cashiers, retail salespersons, customer service representatives, secretaries, housekeepers among others, bring in less money than the median renter household. While households purchasing homes are more likely to have two incomes than renter households (and thus a higher median household income combined), even two-income households struggle to afford to buy in competitive markets.
Save Up Enough Cash (but it May Not Be As Much As You Think)
The down payment is one of the most daunting parts of home buying; and in fact, two-thirds of renters cite saving for a down payment as the biggest hurdle to buying a home, according to the “Zillow Housing Aspirations Report”. The findings from the Zillow Group Consumer Housing Trends Report 2017, state that almost one-third (29 percent) of buyers in the Real Estate market express difficulty when trying to save for the down payment.
The national median home is valued at $201,900, and with the traditional 20 percent down payment, that’s $40,380 up front cost just for the down payment, there would be additional loan costs and fees prior to moving in. The down payment remains a hurdle for a lot of people, and although putting down less than 20 percent may mean additional considerations, such as the cost for private mortgage insurance (PMI), some find it worth the hassle. In fact, only one-quarter of buyers (24 percent) put 20 percent down, and just over half of buyers (55 percent) put less than the traditional 20 percent down.
Buyers are also getting creative about piecing together a down payment from multiple sources. According to the report findings, nearly 1 in 4 buyers (24 percent) build a down payment from two or more sources, including saving, gifts, loans, the sale of a previous home, stocks, retirement funds and other resources.