If you're thinking about buying a home, you're probably aware of a variety of do's and don'ts. For example, don't make other major purchases, don't waive home inspections, and take into account mortgage considerations. House maintenance costs.
But here's what you might not have expected. According to Zillow, you need an annual income of at least $106,000 to comfortably afford a home. That number is up from $59,000 in 2020 and represents an 80% increase, said Anushna Prakash, economic research data scientist at Zillow, who conducted the study.
Prakash explains that in 2020, a household earning $59,000 a year will be able to pay for a mortgage without exceeding 30% of their income (assuming a 10% down payment). “The median income in the United States that year was about $66,000, so more than half of American households could afford to own a home,” she says.
But the average U.S. household now makes about $81,000, Prakash said, far short of the $106,000 needed to comfortably keep up with payments. “The monthly mortgage payment for a typical home in the U.S. has nearly doubled since January 2020, increasing 96.4% to $2,188 (assuming a 10% down payment),” Prakash said.
According to Zillow, these five cities have the lowest household income required to buy a home.
- $58,000 — Pittsburgh
- $70,000 — Memphis
- $71,000 — Cleveland
- $74,000 — New Orleans
- $74,000 — Birmingham
And it's the highest of the following five cities:
- $454,000 — San Jose/Silicon Valley
- $340,000 — San Francisco
- $279,000 — Los Angeles
- $274,000 — San Diego
- $214,000 — Seattle
“Housing costs have skyrocketed over the course of the pandemic, and our incomes have not been able to keep up,” Prakash said. And first-time homebuyers are the most affected, as they lack the benefit of built-up home equity.
“However, rising mortgage rates and home prices are also impacting would-be sellers, who are less likely to sell and become buyers in today's market,” Prakash points out. This holding pattern, in turn, limits supply and keeps prices high. “That's one of the biggest reasons why it's so hard to find a home today, let alone find an affordable home,” she explains.
Options for buyers
But this doesn't necessarily mean buyers with incomes below $106,000 are locked out of the housing market.
Terry DeMonaco, an agent with Coldwell Banker Realty in Naples, Fla., offers one solution that requires patience. “If you wait and save up a larger down payment, you can reduce your loan amount and monthly mortgage payment,” she says. Alternatively, DeMonaco suggests you could wait until mortgage rates come down and your monthly payments will be lower.
However, if patience isn't your thing, she has another option. “Explore more affordable areas where home prices may be lower,” DeMonaco says. While it's a mistake first-time homebuyers make to settle for a home that might not work, it's equally important not to buy a home you can't afford. While location is certainly important, keep in mind that homes in prime locations tend to command a corresponding price tag. Building a home in a transitional (yet safe) area, close to your desired neighborhood and with a good school district (if you have children) can be a much more affordable option.
One way that homeownership is becoming more achievable is the trend of sharing a home with friends and family.
And the market has softened enough that seller incentives are worth considering. “Our market has seen a 59% increase in inventory since last January, and with more choice for buyers, sellers may be more willing to offer incentives to attract buyers.” DeMonaco explains. “These incentives include covering all or a portion of the buyer's closing costs, participating in a mortgage buyout program, offering the seller financing on the loan, and even offering the option to assume an existing mortgage. That could include things like that.'' And you can always refinance when interest rates drop, which lowers your monthly payments, she says.
avoid family poverty
Being housing poor means spending a disproportionate amount of your income on housing costs. Bill Golden, a real estate agent and associate broker with Keller Williams Realty InTown Atlanta, said, “Owning a home is the quintessential American dream, but when money is tight and you feel lost,… , which could quickly turn into a nightmare.” “It's not something you can easily change, like selling the overpriced car you bought or quitting the overpriced health club you joined,” he explains.
Mortgage lenders have safeguards in place in relation to qualified buyers, and Golden says this is to ensure they can afford the mortgage. But you can't always use that number as a guide. “Most clients tell me there's a number they can qualify for, but that's not necessarily the same number they're happy with,” he explains.
Felton Ellington, community lending manager at Chase Home Lending, shares this view, saying lenders will review your debt-to-income ratio, but no one knows as much about your personal finances as you do. Explain that there is no one there. “A qualified loan professional can help you set a budget for what you can afford for a home on paper, but think twice about what payment options are feasible and sustainable for homebuyers. That is very important,” he added. So even if you can technically afford a more expensive home, your monthly payments could be higher than you'd like, he says.
“In that case, it's probably best to set your housing budget below your criteria,” Ellington says. 'While it may be tempting to spend more than your budget to buy a home that ticks all the boxes on your wish list, it's important to make sure you can afford it sustainably over the life of your mortgage. .”
Financial preparation is very important when determining the amount of home you can comfortably afford. “Carefully consider your budget and financial situation to prepare for the rising costs of homeownership,” says Mike Downer, a broker associate at Coldwell Banker Realty in Naples, Florida. “Research and planning are essential, analyzing the current housing market in your desired area to understand trends in home prices, interest rates, and affordability, as well as understanding your budget, desired location, home features, and financing overview. Develop a comprehensive plan that summarizes the options.”
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