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.
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.