Can You Afford to Buy a Home on Your Salary?

afford a house

57 percent of Americans feel buying a house has become less appealing, reflecting a widespread belief that fewer people can afford to buy homes, according to a Hart Research Associates survey. Ray Martin of CBS MoneyWatch says this reflects property costs rising faster than wages, coupled with economic challenges for consumers trying to save down payments and afford mortgages. Given these conditions, you might be wondering how to go about determining whether you can afford a home on your salary.

Estimating What You Can Affordafford a house

As the Federal Home Loan Mortgage Corporation explains, a number of key factors determine whether you can afford a home. These include annual gross income, credit history, and down payment availability.

To evaluate how these factors translate into your ability to afford a home, lenders consider two key ratios. The first is your housing expense ratio, relating your mortgage payment costs to your gross income. Lenders recommend your mortgage payment should be no more than 28 to 36 percent of your monthly gross income.

The second key is debt-to-income ratio. This compares your obligations on mortgage and other debts such as student loans and car payments to your gross income. Your monthly debts should not exceed 30 to 43 percent of your gross income.

For a precise estimate of what you can afford, Bank of Little Rock Mortgage Senior Vice President Lee Maris recommends that first-time home buyers get pre-approved for a mortgage before shopping for homes.

Searching for Affordable Homes

With a sense of what you can afford, you can gather information about homes within your range. Online databases such as those provided by the U.S. Department of Housing and Urban Development and Socialserve can help locate homes fitting specific criteria. Geographical search tools can also help you find locations with homes you can afford. For instance, as of July 2014, Trulia’s national homes price page shows that the median listing price of a home in New York’s Queens County is $419,000, compared to $839,000 for San Francisco County, $189,500 for Cook County, or $142,500 for St. Louis County. Another way to find a more affordable home is to purchase a less expensive residence to renovate. For instance, you might buy a home and then install energy-efficient windows, both improving the value of the property and lowering your long-term energy costs. Realtor recommends that if you buy a home to renovate, the most cost-efficient strategy is to look for these types of potential cosmetic renovations to windows, paint, wallpapers, carpets, tiles, doors, kitchens, bathrooms, and fixtures. Do a home inspection and count the cost before considering more expensive renovations such as upgrading roofing, heating, or air conditioning.

Exploring Down Payment and Financing Options

When it comes to paying for your home, nearly eight out of 10 first-time home buyers use savings to raise their down payment, while a third receive a gift from family or friends, and about one in 10 draw from investments or retirement savings, according to the National Association of Realtors. Traditionally your down payment should equal 20 percent of your home’s price, but some options allow this to go as low as 3 to 5 percent. As for financing, the NAR reports that over nine out of 10 first-time buyers go with a fixed-rate mortgage, four out of 10 use a low down payment FHA mortgage, and nearly one in 10 go with no down payment using the VA’s loan program. HUD’s site can point you towards online resources and housing counselors and other resources to help explore financing options.

The Ins & Outs of Avoiding Bad Credit Pitfalls for College Grads

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When it comes to credit score, there’s no such thing as throwing out the lowest test grade or offering a chance for extra credit. That’s why college students need do their homework early on so they can pass the credit test during those vital first few years in the “real world.”

The first rule of credit: Use it or lose it.

In other words, in order to create a strong credit profile (and qualify for future auto or home loans), you have to demonstrate that you’re able to use credit responsibly. You’ll likely have to start out slow, like opening your first credit card account, making small but manageable purchases with it, and paying your bill on time every month. From there, whether you have an auto loan or a cell phone bill, the key is to make on-time payments.

Need a Bail Out? Transfer Your Credit Card Balance

You’ll have to pay your dues.

As is the case with breaking into a new field right out of college, sometimes your youth goes against you and you have to prove yourself. In other words, you won’t get the best credit card rates in the early years of your credit history because you haven’t earned them. But you can and should still shop around for a card that has terms you can live with for a while (for starters, look for cards with no annual fee). The reason being you want to keep your first major accounts active for a few years to establish a strong history. Opening and closing new accounts all the time will negatively affect your credit score.

Don’t screw up your parents’ credit.

If your parents put you on as an authorized user on any of their accounts or co-sign to help you open a credit account or car loan, that’s an additional reason to be responsible with payments. If you don’t, it will ding their credit scores as well as yours.

Late payments are not “no big deal.”

As soon as you are late — even one day — on a credit card payment, your lateness is reported to one or all of the credit bureaus (Equifax, TransUnion, and Experian). The longer it takes you to pay, the worse it is (being 90 days overdue is worse than 30 days, for instance). To avoid being late, be sure you don’t spend beyond your means, and set an email, text, or calendar alert so you have a reminder to make your payments on time.

Minimum payments will keep you in debt for decades.

Paying your bills on time is the easy part; paying your balance in full is the challenge. If you run up your accounts and begin carrying large balances, paying just the minimum won’t do much to bring down your debt thanks to interest that keeps accumulating. And when it comes to credit scores, how much debt you have as compared to how much credit you have available is a big part of the equation. So if you have a $1,000 credit limit and a $700 balance, you have a 70 percent debt utilization (not good!). Experts say to keep it under 30 percent, or even better, pay your balance in full each month.

A healthy credit start takes discipline, especially for college grads who are just beginning to deal with financial independence. But it’s a much easier road than trying to dig out from under a credit score that tanks.

Todd Hills is the CEO of Pawngo , the first full-service online pawn shop intodd pawngo hills the United States. After more than 25 years owning and operating brick and mortar pawn shops, Hills decided to bring this 3,000 year-old industry online.