How Much House Can You Afford?
According to the National Association of Realtors, the average home is now $ 341,600.
At first glance, this price may seem prohibitive to many hopeful homebuyers. But you don't need a six-figure salary (or even close to) to achieve this.
If you have great credit and a 20% down payment, you can actually afford a home at the average price with an income of just $ 46,500.
Those with lower credit scores and smaller down payments will need something more.
Do you want to buy a home in today's market? Here's what you need to be able to afford it.
Confirm eligibility to buy a house (June 2, 2021)
In this article (continue to …)
How much will a house cost in 2021?
In April 2021, a mid-price home was $ 341,600.
According to the Federal Housing Finance Agency, prices rose by 12.6% over the course of the year and by 3.5% in the first quarter of 2021 alone.
House prices rose the most in Idaho (23.7%), Utah (19.2%), Arizona (17.4%), New Hampshire (16.2%) and Connecticut (15.9%).
Demand has been a big contributor to the rise in home prices.
With many tenants now working from home and some saving their money during the pandemic, there is a lot of catching up to do for housing. The low interest rates are also fueling the fire.
Today's home loan programs are flexible. No minimum income is required to buy a home.
This leads many first-time home buyers to wonder if they can afford a home in today's real estate market.
The good news is that home loan programs are flexible. So there is no minimum income to buy a house.
In fact, low-income buyers can often become homeowners if they know which mortgage loan to apply for.
Here are a few examples to show you how to determine your home ownership eligibility based on your annual income and financial situation.
The income that you need to afford to buy this $ 341,600 home is probably not as much as you think.
However, the exact amount depends, among other things, on the loan program you have chosen, your down payment amount and your creditworthiness.
Let's look at some examples:
Main borrower (20% less)
"Prime" borrowers are those with the highest creditworthiness (think 740 or higher) and high down payments who qualify for a traditional loan.
they do Not You must be a first class borrower to buy a new home.
However, with good credit and a 20% discount, home buying becomes more affordable even for those on a low or middle income.
Here's what buying a $ 341,600 home would look like in this scenario:
House price: $ 341,600Deposit: $ 68,320 (20%)Fixed rate *: 2.95%Loan: Conventional fixed interest rate over 30 yearsDebt: Only $ 250 in existing monthly debtRequired income: $ 46,500
Remember, this example does not include property taxes or home insurance as these vary widely from borrower to borrower.
Your taxes and insurance will affect your monthly mortgage payment. Hence, it is important to take these into account when determining how much home you can afford.
Use a mortgage calculator with property taxes, homeowner insurance, and personal mortgage insurance (PMI) to estimate your "real" home payment and home purchase budget.
Find Out How Much Home You Can Afford (Jun 2, 2021)
FHA Borrowers (3.5% Down)
Federal Housing Administration (FHA) loans are designed for borrowers with lower creditworthiness and / or lower incomes.
FHA mortgages are more flexible than traditional loans in terms of your credit history and debt-to-income ratio (DTI), which makes qualifying easier.
This FHA loan example depicts a borrower with a modest credit score (640 and above) and a minimal down payment.
Here's what buying a mid-price home would look like in this scenario:
House price: $ 341,600Deposit: $ 11,965 (3.5%)Fixed rate *: 3.5%Loan: FHA 30 yearsDebt: $ 500 in existing monthly debtRequired income: $ 77,900
Again, no property taxes, home insurance or mortgage insurance costs are included. Your mortgage lender can help you estimate this on your behalf.
Note that the borrower using an FHA loan will need a higher income to buy a home than a prime borrower. There are a couple of reasons for this.
First, this borrower pays a much smaller down payment (3.5% of the purchase price versus 20% in the previous example). That means they borrow a larger amount to buy the same house.
A larger loan amount means higher monthly payments. Hence, the borrower needs a higher monthly income to be able to afford the same house.
In addition, this model home buyer spends a larger part of his gross monthly income on existing debts. This can include things like credit card payments, car payments, and student loans ($ 500 versus $ 250 above).
The more you spend on monthly debt payments, the less money you have left on a mortgage each month. That means you will need a higher income to buy a home if you have a lot of existing debt.
Check Your FHA Loan Eligibility (Jun 2, 2021)
VA or USDA borrowers (0% less)
VA loans and USDA loans – backed by the United States Department of Veterans and Agriculture, respectively – are unique in that they do not require a down payment.
To qualify for a VA loan, borrowers must be a veteran or active service member. To be eligible for USDA funding, you must buy a home in a qualifying "rural area" (many suburbs and small towns are eligible).
Here's what buying a mid-price home could look like in both scenarios:
House price: $ 341,600Deposit: zeroFixed rate *: 3.25%Loan: VA or USDA 30 yearsDebt: $ 500 in existing monthly debtRequired income: $ 78,600
The calculations do not include mortgage insurance premiums (required for USDA loans) or home insurance and property taxes.
USDA and VA borrowers may require a higher income than those using a traditional loan because they do not invest any money and thus have a larger balance to pay over the loan term.
There is no minimum income to qualify for a VA or USDA loan.
However, the USDA sets income caps that limit the amount of household income you can earn and still qualify. You can find more information about the USDA's income limits here.
Check Your Zero Down Mortgage Eligibility (Jun 2, 2021)
* All interest rates are for example purposes only. Your own mortgage rate will be different. Here you can check your home loan at current mortgage rates.
What Affects Your Home Buying Budget?
As you can see, the amount you need to buy a home will vary a lot depending on the loan program you choose, the size of your loan, and your mortgage rate.
Your existing debts – especially your debt-to-income ratio – and your creditworthiness also play a large role.
In general, the higher your credit rating, the lower your interest rate. So you can afford a higher priced home with less money.
If you are concerned that your income is too low to buy a home, the best way to improve your chances is to increase your FICO score and save as much as you can for a larger down payment.
You don't need 20% less, but every little bit will help reduce your loan amount and increase your home purchase price range.
Check your home ownership eligibility
Housing values may go up, but you don't need a high salary to be able to afford one.
With good credit, a decent down payment, and little debt, buying a home in the market today is more affordable than you might think.
Confirm your new price (June 2nd, 2021)