Three Elements to Consider
If you’ve considered buying a home, finances are usually your biggest factor to consider. It will either make you move forward or wait. Things like debt, low-paying jobs, little to no savings, educational costs, and car maintenance often take precedence in your life.
Yet, the thought of paying rent reminds you that all you’re doing is building someone else’s wealth, instead of your own. Ouch! So, realistically, what does it take for you to move ahead in life and make the leap?
Consider these elements:
1. What is your debt-to-income ratio?
A lender will assist potential home buyers with determining your debt-to-income (DTI) ratio. To give you an idea, it’s basically adding up all your monthly bills (e.g. rent, utilities, car payments, minimum credit card payments) and dividing this number by your monthly salary, giving you a percentage. Your DTI determines if you can afford to pay your mortgage. The lower your DTI, the more likely you will be approved for a loan. If you want to learn more about DTI, read this great article by NERDWALLET.
2. How much should your home cost?
Once you know your DTI, you can now see how much home you can afford. According to Fidelity, you should factor in how much you make. The price of the home you are looking for should be a maximum of 3-5 times your total household income. Again, this is just a general guideline There are many factors to consider. Your financial adviser or lender can help you with this. The less debt you owe (DTI), the more value of the home you can afford. With no debt, your home can cost up to 5 times your annual income. With more than 20% of your monthly income going to expenses, then you can purchase a home up to 3 times your annual income. This is with other elements considered, of course.
3. The Current Market
This is a biggie! There are many factors that determine the current real estate market. Examples include population growth, growth domestic product (GDP), and government policies such as tax credits. Learn more about current market indicators in “4 Key Factors That Drive the Real Estate Market” by Investopedia. What everyone is watching right now is INTEREST RATES, a very big part of determining the housing market. Today’s mortgage interest rates are 3.00% compared to 4.00% this time last year. A full percentage point is a lot and will make a huge impact on your mortgage payment making it more affordable for the buyer.
Here are what three experts had to say:
CoreLogic’s Typical Mortgage Payment
“Falling mortgage rates and slower home-price growth mean that many buyers this year are committing to lower mortgage payments than they would have faced for the same home last year. After rising at a double-digit annual pace in 2018, the principal-and-interest payment on the nation’s median-priced home – what we call the “typical mortgage payment”– fell year-over-year again.”
The National Association of Realtors Affordability Index
“At the national level, housing affordability is up from last month and up from a year ago…All four regions saw an increase in affordability from a year ago…Payment as a percentage of income was down from a year ago.”
First American’s Real House Price Index (RHPI)
“In 2019, the dynamic duo of lower mortgage rates and rising incomes overcame the negative impact of rising house price appreciation on affordability. Indeed, affordability reached its highest point since January 2018. Focusing on nominal house price changes alone as an indication of changing affordability, or even the relationship between nominal house price growth and income growth, overlooks what matters more to potential buyers – surging house-buying power driven by the dynamic duo of mortgage rates and income growth. And, we all know from experience, you buy what you can afford to pay per month.”
Low interest rates dramatically increase your ability to afford a home NOW. It’s time to take advantage and seriously look into whether you can make the jump to purchasing a new home.
The reason for this is that most financial experts, including former chair of the Federal Reserve Ben Bernanke, predict that the market will take a nosedive in 2020. See this Forbes article “4 Financial Savants Warn About The Great Crash Of 2020“.
WHAT TO REMEMBER:
NOW is a great time to invest in owning your first home, downsizing to meet your current needs, or buying a bigger nicer home for your family. Look into this and set yourself up for financial success and wealth-building NOW before it’s too late.
