Low housing supply, inflation, and high living expenses – these are all common reasons behind the ongoing housing affordability crisis. Whether you’re a first-time homebuyer or an experienced homeowner, knowing which financial and social factors affect your house affordability can make a world of difference.
Let’s take a closer look!
Income and Wages
Naturally, how much money you earn significantly impacts your purchasing power. A higher income generally translates to more expensive houses.
This can also be applied to loan borrowing capabilities. Lenders closely monitor a borrower’s gross (before-tax) income to determine how much risk they pose and how much mortgage they can handle. For instance, dual-income households generally get approved for a bigger loan amount.
Mortgage Interest Rates
Another critical factor that impacts house affordability is the mortgage interest rate. Most lenders offer two types of interest rates:
Fixed Rate: It stays the same over the life of the loan. Most first-time homeowners prefer a fixed interest rate due to its predictability.
Variable Rate: It varies over time depending on market conditions. Most adjustable interest rate mortgages start lower but increase over time.
Interest rates aren’t random. They depend upon various factors, such as:
- Credit score
- Loan type
- Market conditions
- Specific regulations
- Overall housing economy
The lower your interest rate, the more affordable your house becomes. For accurate mortgage estimates, use a calculator for how much house I can afford. You need to enter your monthly income, monthly expenses, down payment, loan term, and interest to get a realistic number.
Living Expenses
Living expenses play a crucial role in determining how much house you can truly afford. Start by considering regular monthly costs, such as groceries, utilities, transportation, healthcare, dining out, and shopping.
Mortgage lenders, such as AmeriSave, typically focus on the debt-to-income (DTI) ratio and credit score. Therefore, it’s up to you to account for these expenses. For instance, if you have high utility bills or specific lifestyle needs, your available income for a mortgage may be lower than the bank assumes. So, plan ahead and cut down unnecessary expenses to boost affordability.
The last thing you need is to be “house poor,” where you spend all your income on monthly debt payments and have nothing left for day-to-day expenses.
Homeownership Costs
Homeownership comes with a multitude of additional costs and expenses. This includes:
- Property taxes
- Homeowners insurance
- Private mortgage insurance (if your down payment is less than 20%)
- Homeowners Association (HOA) fees
Don’t overlook additional maintenance and repair costs. It could be a leaky roof, a broken appliance, or an HVAC unit fault. The bottom line is that homeowners must put aside at least 1% of their home’s value each year for maintenance.
Government Policies
Government policies and programs also impact house affordability. Homeowners can benefit from first-time buyer assistance programs, low-income housing tax credits, and affordable housing initiatives to boost affordability.
Being aware of such government opportunities can help you save money and fulfill your dream of owning a home much earlier than expected.