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For first-time homebuyers, finding the perfect time to enter the real estate market can be an endless game. In the face of record high inflation, high interest rates and a dwindling supply of new homes, the journey from renter to homeowner is becoming increasingly challenging.
But amid the economic uncertainties, there are strategic steps potential buyers can take to ensure they are well prepared when the right opportunity presents itself.
For starters, it’s critical to have a clear picture of your financial situation and determine how much purchasing power your annual income can bring. The median sales price of homes sold in the U.S. so far this year is $487,300, according to data from the U.S. Census Bureau.
The cost of day-to-day expenses has risen, potentially making it more challenging for homebuyers to cover the upfront costs associated with buying a home. While the consumer price index (CPI) indicated a slowdown in overall prices, as reported by the US Department of Labor, specific indices such as lodging, home furnishings and operations, auto insurance, recreation and clothing showed a slight increase.
Understanding the 28/36 rule can serve as a useful yardstick for potential buyers. This rule suggests that no more than 28% of a buyer’s monthly pre-tax income should be allocated to housing costs, and that total housing costs plus monthly debt payments should not exceed 36% of their pre-tax income. Housing costs include various expenses, including mortgage payments, property taxes, home insurance, mortgage insurance and HOA costs. Debt payments, on the other hand, account for monthly bills related to student loans, car loans, credit cards, and other debts.
Checking out:
It’s worth noting that buyers can still qualify for a mortgage even if their housing costs and debt exceed the 28/36 rule. For example, FHA loans backed by the Federal Housing Administration allow housing costs up to 31% of pre-tax income and debt plus housing costs up to 43% of pre-tax income. In certain cases, some flexibility is possible.
To give a practical example, if you put down 10% on a $333,333 house, your mortgage would be about $300,000. According to calculations, you would ideally need an annual pre-tax income of at least $110,820 to qualify for this scenario, although a slightly lower annual income of $100,104 may still qualify. These calculations assume an interest rate of 7%, a term of 30 years, no recurring debt payments, no VvE contribution and estimated monthly costs for private mortgage insurance, property insurance and home insurance.
Similarly, if you put down 10% on a $555,555 home, your mortgage would total about $500,000. In this case, the recommendation is a minimum annual pre-tax income of $184,656, but qualification may still be possible with an annual income of $166,776. Again, these calculations take into account a 7% mortgage rate, a 30-year term, no recurring debt payments, no homeowners association contribution, and estimated monthly costs for private mortgage insurance, property taxes, and home insurance.
Now if you get closer to the median home price, if you were to put down 10% on a $444,444 house, resulting in a mortgage of about $400,000. The recommended annual pre-tax income is a minimum of $147,696, but a lower annual income of $133,404 may still qualify.
It’s important to note that these numbers are general guidelines and the exact amount you can comfortably pay each month will depend on your financial commitments and goals.
Given that the median personal income in the United States is $63,214 as of 2023, with the median income of $44,225, it is clear that affordability varies significantly between different regions. Real wages averaged $67,521 in 2022, with median household incomes of $87,864. With an annual income of $70,000, it’s reasonable to expect to be able to afford a house between $290,000 and $360,000.
Finding affordable homeownership may seem out of reach for middle-income earners, but there are still options to consider. While median income may not match the income needed to buy a home at the median sale price, don’t give up hope. An alternative way to explore is investing in real estate.
Investing in real estate offers people the opportunity to build wealth and generate passive income. While homeownership can be challenging, investing in real estate allows you to participate in the market and potentially reap the returns.
While you continue to work on homeownership, renting for an extended period of time need not be a setback. Use this time to your advantage by living as if you already had a mortgage. Save the difference between your rent and the estimated mortgage payment to increase your down payment, pay off debt, or start an emergency fund. Remember that there is more to life than mortgage payments, and it is essential not to become fixated on acquiring a home to the detriment of your financial well-being.
Flexibility and open-mindedness are key when navigating the real estate market.
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This article Average Income Earners Don’t Earn Enough to Qualify for the Average House – Here’s How Much You Should Earn for a $500,000 Mortgage originally appeared on Benzinga.com
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