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. As your earnings increase, you’re able to afford a larger mortgage and, therefore, a larger house.
Income doesn’t just affect the amount you can afford upfront, but also your 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. This is why individuals with higher incomes are more likely to be approved for larger loans.
For example, dual-income households generally get approved for a bigger loan amount. The combined income allows for a higher debt-to-income (DTI) ratio, which is a critical metric that lenders use to assess affordability. So, if you’re part of a two-income household, you might be able to afford more than a single-income household would, even with similar expenses.
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:
A fixed-rate mortgage keeps the interest rate the same throughout the life of the loan. This provides predictability for the borrower, making budgeting easier. It’s a popular choice among first-time homeowners because it offers stability in monthly payments.
Variable Rate:
A variable-rate mortgage, also known as an adjustable-rate mortgage (ARM), has an interest rate that fluctuates over time based on market conditions. While an ARM often starts with a lower interest rate than a fixed-rate mortgage, it can increase over time, potentially making the loan more expensive in the long run.
Interest rates aren’t random. They depend upon various factors, including:
Credit score: Lenders typically offer lower rates to borrowers with higher credit scores because they are considered less risky.
Loan type: Different types of loans, such as FHA loans, VA loans, or conventional loans, may have varying interest rates.
Market conditions: Mortgage rates are influenced by economic factors, such as inflation, central bank policies, and global financial trends.
Specific regulations: Government regulations can sometimes affect the rates lenders can offer.
The lower your interest rate, the more affordable your house becomes. In fact, even a small difference in interest rates can result in significant savings over the life of a mortgage. To get an accurate estimate of how much house you can afford, use a calculator for how much house I can afford. By entering your monthly income, expenses, down payment, loan term, and interest rate, you can get a more realistic idea of your price range.
Living Expenses
Living expenses play a crucial role in determining how much house you can truly afford. Beyond just your mortgage, there are ongoing living costs that affect your overall budget. These include:
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 to assess how much you can afford. However, it’s important to remember that they may not account for all your living expenses. For instance, if you have high utility bills, significant childcare costs, or specific lifestyle needs, your available income for a mortgage may be lower than what the bank assumes.
It’s up to you to account for these expenses when budgeting for a home purchase. If your income is stretched thin because of high living expenses, you may want to scale back on non-essential spending to increase your affordability. The last thing you want is to be "house poor," where most of your income goes toward paying for your mortgage, leaving little room for day-to-day living expenses.
Homeownership Costs
Homeownership comes with a multitude of additional costs and expenses that go beyond the mortgage payment. These include:
Property taxes: The cost of property taxes varies by location and can fluctuate year-to-year.
Homeowners insurance: Most mortgage lenders require homeowners insurance to protect against losses from fires, storms, or other disasters.
Private mortgage insurance (PMI): If your down payment is less than 20% of the home's purchase price, you’ll likely need to pay for PMI, which adds an extra cost to your monthly payment.
Homeowners Association (HOA) fees: If you purchase a property in a community with a homeowners association, you’ll likely face monthly or annual HOA fees for property maintenance, amenities, and communal services.
Additionally, maintenance and repair costs are often overlooked. Homeowners should set aside at least 1% of their home’s value each year for maintenance. Whether it’s fixing a leaky roof, repairing an appliance, or addressing an HVAC issue, these expenses can add up quickly. It’s essential to plan for these additional costs so you don’t face financial strain after purchasing your home.
Government Policies
Government policies and programs also play a significant role in housing affordability. Various programs can help reduce the overall cost of purchasing a home, especially for first-time buyers or low-income households. These include:
First-time buyer assistance programs: Many governments offer down payment assistance, lower interest rates, or special loans for first-time buyers to ease the transition into homeownership.
Low-income housing tax credits: Some tax credits are designed to make housing more affordable for low- and moderate-income families.
Affordable housing initiatives: In certain areas, local governments may offer programs aimed at increasing the availability of affordable housing.
Being aware of these programs and how they can help reduce costs is important. They can enable you to buy a home much sooner than expected and avoid the financial strain that often accompanies homeownership.
Conclusion
The journey to homeownership is influenced by a variety of factors that impact your house affordability. From your income and mortgage interest rates to living expenses, homeownership costs, and government policies, all of these elements work together to determine what you can afford.
By understanding how these factors play a role, you can make more informed decisions and avoid the pitfalls of overextending your budget. Start by analyzing your income and living expenses, choose the right mortgage type, and factor in additional costs like property taxes and maintenance. With careful planning and a clear understanding of your financial situation, you’ll be better positioned to find a home that suits both your needs and your budget.
