For first-time home buyers, finding the perfect time to enter the real estate market can seem like a never-ending game. Faced with record inflation, high interest rates and a declining supply of new homes, the transition from tenant to owner has become increasingly difficult.
But amid economic uncertainties, there are strategic steps potential buyers can take to ensure they’re well-prepared when the right opportunity arises.
To begin, it is crucial to fully understand your financial situation and determine the purchasing power that your annual income can give you. The average sale price of homes sold in the United States so far this year is $487,300, according to data from the US Census Bureau.
The cost of day-to-day expenses has increased, potentially making it harder 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 indexes such as housing, furnishings and household operations, l car insurance, leisure and clothing saw a slight increase.
Understanding the 28/36 rule can serve as a useful reference for potential buyers. This rule suggests that no more than 28% of a buyer’s pre-tax monthly income should be allocated to housing costs, and that the total of housing costs plus monthly debt repayments should not exceed 36% of their pre-tax income. Housing costs encompass a variety of expenses, including mortgage payments, property taxes, home insurance, mortgage insurance, and homeowners association fees. Debt payments, on the other hand, represent monthly bills related to student loans, auto loans, credit cards, and other debts.
It should be noted that buyers may still qualify for a mortgage even if their housing and debt costs exceed the 28/36 rule. For example, FHA loans backed by the Federal Housing Administration allow housing costs of up to 31% of pretax income and debt, and housing costs of up to 43% of pretax income. In some cases, some flexibility may be available.
To give a practical example, if you were to bet 10% on a $333,333 house, your mortgage would be around $300,000. According to the calculations, you would ideally need a pre-tax annual 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 homeowners association fees, and estimated monthly costs for private mortgage insurance, property tax, and Home Insurance.
Similarly, if you were to put 10% down on a $555,555 home, your mortgage would total about $500,000. In this case, the recommendation is a minimum pre-tax annual 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 fees, and estimated monthly costs for the private mortgage insurance, property tax and home insurance.
Now, approximating the average house price, if you were to bet 10% on a $444,444 house, that would result in a mortgage of around $400,000. The recommended pre-tax annual income is at least $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 afford each month will depend on your financial obligations and goals.
Considering that the average personal income in the United States is $63,214 in 2023, with a median income of $44,225, it is evident that affordability varies significantly from region to region. Real wages averaged $67,521 in 2022, with average household income reaching $87,864. With an annual income of $70,000, it’s reasonable to expect that you could afford a home between $290,000 and $360,000.
Finding an affordable property may seem out of reach for middle-income earners, but there are still options to consider. Although average income may not equal the income needed to buy a home at the median sale price, don’t lose hope. Another avenue to explore is real estate investment.
Real estate investing offers people the opportunity to build wealth and generate passive income. Although home ownership can be difficult, investing in real estate allows you to participate in the market and potentially benefit from its returns.
While you continue to work towards home ownership, renting for an extended period doesn’t have to be a setback. Use this time to your advantage by living like you already have a mortgage. Save the difference between your rent and the estimated mortgage payment to increase your down payment, pay off debts or create an emergency fund. Remember, life is about more than mortgage payments and it’s important not to become obsessed with home ownership to the detriment of your financial well-being.
Flexibility and open-mindedness are key to navigating the real estate market.
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This article Middle Income People Don’t Earn Enough to Qualify for the Average Home – Here’s How Much You Need to Earn for a $500,000 Mortgage originally appeared on Benzinga.com
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