I was reading through the latest quarterly home price report from the National Association of Realtors yesterday and stumbled upon an interesting nugget.
It might seem obvious, but it’s worth pointing out to prospective home buyers who might be lacking in the income department.
Put simply, if you are able to come to the table with more money for a down payment, you’ll be able to buy more house.
Allow me to explain, using the NAR’s latest Metropolitan Median Area Prices and Affordability and Housing Affordability Index release.
National Median Home Price Rises to $217,600
- Expect home prices to keep rising
- Which should continue to hurt purchasing power
- But if you’re able to come in with a larger down payment
- You can keep your loan amount at a reasonable level and boost affordability
In the report, they noted that the national median existing single-family home price rose to $217,600 in the first quarter of 2016, up 6.3% from a year earlier ($204,700).
For the record, the pace slowed a bit as the median price in the fourth quarter of 2015 was 6.7% higher than it was during the fourth quarter of 2014.
Still, we continue to see healthy (maybe too healthy) home price growth and it’s probably going to keep rising, which should make it more difficult for some would-be buyers to purchase homes due to DTI restrictions.
Yes, mortgage lenders limit what you can afford based on your income, but there’s a way around this if you happen to have money in the bank (or a relative willing to gift you money for a down payment).
The more you put down, the smaller your loan amount will be. And the smaller your loan amount, the less income you’ll need to qualify for a mortgage.
In the report, NAR highlighted the fact that affordability declined in the first quarter compared to the first quarter of 2015 because of higher home prices.
National family median income actually increased marginally to $68,431, but it wasn’t enough to offset the home price gains.
What It Takes to Buy a Median Priced Home
- Let’s consider the income you need to buy a median-priced home
- Which varies based on the down payment
- As you can see, the more you put down, the less you need to make
- Of course you’ll have to save more of your money along the way
As a result, this is what is now needed in the way of income to purchase a single-family home at the national median price:
If 5% down payment: income of $47,819
If 10% down payment: income of $45,302
If 20% down payment: income of $40,268
Assuming you’re a frugal person who actually socks away savings, unlike most Americans, you’ll be able to buy the median priced home despite having significantly lower income than other individuals.
In fact, if you’re able to come in with a 20% down payment, you can buy that $217,600 median home price with just over $40,000 in annual household income.
Meanwhile, someone only able to muster a 5% down payment will need to be making over $47,000 a year.
You might be thinking that the person with a lower income probably has more difficulty saving, but that’s not always the case.
There are plenty of folks who simply live beyond their means, despite making more money, and wind up with nothing in the way of savings.
The point here is that you don’t need to make a ton of money in order to buy a house. You’ll just need more money for the down payment.
Another benefit of a higher down payment, specifically of 20% or more, is that you can avoid costly mortgage insurance entirely.
You’ll also have a decent chunk of equity in your home, which will give you the ability to sell it if need be, or refinance in the future. And overall, you’ll have more lending options when you put more money down.
Avoid Other Debt and Your Income Goes Further
- If your income is constrained and not expected to increase
- You can further your purchasing power
- Simply by paying off debt and not accumulating new debt
- This means more of the income you have can go toward a mortgage
Another way to boost your home buying power is simply to avoid other debt.
If you don’t have any outstanding credit card debt, auto loans, student loans, etc., your income will go further when it comes to the mortgage.
When lenders determine how much you can afford, they combine all your monthly liabilities from your credit report and use your income to offset them.
If you have a ton of liabilities, your income won’t go as far as it will already be swallowed up by car payments, credit card payments, etc.
Conversely, if you’ve paid off your car and carry no other debt, that full amount of income will be available to offset your housing costs, boosting what you can afford.