Remember when everyone was buying a house in 2020? Okay, maybe it wasn’t everyone, but it was enough people to spur an unexpected pandemic housing boom. Two years later, the market is beginning to slow down—and for one major reason.
Interest rates have spiked dramatically, making monthly mortgage payments pricier than ever. Within the past year, the average interest rate for a 30-year fixed-rate mortgage has doubled, leaving homebuyers to pay a median of 49% more for their mortgage.
It was much easier (read: more affordable) to purchase a home in 2020 and 2021. But the new mortgage rates are leaving people to wonder, “Can I afford to buy a house right now?” 🤔
Everyone’s financial situation is different. To determine whether you can buy a house and afford the housing payments comfortably, ask yourself a few important questions.
How expensive of a house can I afford in my state?
It’s no secret that living costs are cheaper in some states than in others. You’ll save a significant amount of money by buying a home in the midwest compared to the northeast since mortgage interest rates and costs vary by state. And in some cities (looking at you, Baltimore) you’ll actually spend less on a home purchase than on monthly rent. 🤯
In addition to your location, factors that will affect how much you can spend on a home purchase include your:
- Total monthly debt (e.g. how much you spend on credit card payments, car payments, or student loan payments per month)
- Gross monthly income (household income, if you are buying with a partner or partners)
- Recurring monthly expenses
- Mortgage loan amount
- Housing expenses (e.g. annual property taxes, homeowner’s insurance, homeowner’s association fees)
Home affordability calculator
So to answer your question (“how expensive of a house can I afford?”), it’s best to use a mortgage calculator. Once you input the purchase price of the home, its property tax, your down payment, HOA fees, and loan term (among other information), the calculator will give you a rough estimate of how much you should expect to pay monthly.
Pretty handy, right?
Median home price in 2022
Another way to answer “how much can I afford on a house?” is to look at how much a home typically costs where you live. Here’s a breakdown of the median home price in each state in 2022.
50. West Virginia: $129,518
49. Mississippi: $157,559
48. Arkansas: $169,508
47. Oklahoma: $171,299
46. Iowa: $184,676
45. Kentucky: $188,752
44. Alabama: $193,601
43. Kansas: $198,134
42. Ohio: $201,285
41. Louisiana: $207,009
40. Indiana: $210,442
39. Missouri: $218,486
38. Michigan: $223,744
37. Nebraska: $231,115
36. Wisconsin: $252,959
35. Illinois: $255,179
34. Pennsylvania: $255,547
33. South Carolina: $271,002
32. North Dakota: $271,804
31. Tennessee: $276,250
30. New Mexico: $278,513
29. South Dakota: $279,031
28. Texas: $290,527
27. Georgia: $296,056
26. North Carolina: $297,030
25. Wyoming: $309,063
24. Minnesota: $326,253
23. Alaska: $328,365
22. Delaware: $333,809
21. Maine: $339,212
20. Vermont: $342,217
19. New York: $352,611
18. Connecticut: $360,948
17. Virginia: $362,633
16. Florida: $373,735
15. Maryland: $399,585
14. Rhode Island: $418,342
13. Arizona: $423,280
12. Montana: $426,273
11. New Hampshire: $428,187
10. Nevada: $450,382
9. New Jersey: $452,242
8. Idaho: $468,555
7. Oregon: $507,388
6. Utah: $555,014
5. Colorado: $571,729
4. Massachusetts: $573,729
3. Washington: $605,854
2. California: $775,266
1. Hawaii: $972,147
How much can I afford for a home?
Similar to when getting a car loan or business loan, the best way to figure out how much you can comfortably spend on your mortgage is by taking a look at your own financial situation. A rule of thumb is that you shouldn’t exceed 28% of your annual income on your mortgage.
To calculate how much 28% of your annual income is, multiply your gross monthly income (your monthly income pre-tax) by 0.28.
So if your pre-tax income is $7000 per month, multiply it by 0.28 to get $1960. This is how much you should spend on your mortgage every month.
How much of a down payment should I put down?
A down payment is the equity you have on an item when you first buy it. In this case, your down payment is the part of your home that isn’t financed. Most lenders require homebuyers to put down an amount between 3% to 20% of the total house price.
Besides giving you home equity, a down payment determines how much you’ll pay for your private mortgage insurance (PMI). A PMI is a structure put in place to protect mortgage lenders in case the homeowner defaults on their monthly payments.
What this means for you is that until you have 20% equity (or, ownership) of your home, you’ll need to pay your mortgage lender a monthly premium. However, some lenders will let you make a one-time upfront premium as part of the closing costs.
To avoid paying insurance premiums, homebuyers taking out a conventional loan are advised to make a 20% down payment. Making a 20% down payment may also help you get a lower interest rate on your home loan.
What kind of mortgage should I take out?
There are a ton of different types of mortgages to choose from. When you’re a first-time homebuyer, it can be confusing to know which one to pick. Here’s a general rundown of the different types of mortgages and what they each entail.
1. Conventional loans
A conventional loan is a non-government-sponsored mortgage loan. It’s available almost everywhere, making it the most common type of loan.
It’s broken into two broad categories: conforming and non-conforming. The main difference between the two is that conforming loans adhere to the guidelines set by Fannie Mae and Freddie Mac.
Conventional loans are great if you need a higher loan limit than a government-insured loan can give you. Since they’re given out by private lenders, there’s more flexibility in their loan terms. Conventional loans may also reward borrowers with a high credit score by qualifying them for a low-interest rate.
However, some of the downsides of conventional loans include having a high downpayment and stricter eligibility requirements. Qualifying candidates typically need a good credit report and a low debt-to-income ratio (DTI ratio).
2. Government-backed mortgage loans
Three government agencies provide mortgage loans: the Federal Housing Association (FHA), the U.S. Department of Agriculture (USDA), and the Department of Veterans Affairs (VA).
Government-backed loans provide borrowers with lower interest rates and down payments than conventional loans do. The barrier to entry is also substantially lower, making it easier to buy a new home.
For example, an FHA loan only requires its borrowers to have a credit score of 500, a DTI ratio under 43%, and proof of employment and steady income.
One of the drawbacks of an FHA loan, however, is that the buyer is required to pay PMI and the house has to be their primary residence. This loan cannot be used to invest in, or flip, real estate.
A VA loan is only available to service members, veterans, and surviving spouses. As part of the benefits, there is no down payment required. It is also the only type of mortgage that doesn’t have insurance premiums.
Similarly, a USDA loan doesn’t require a downpayment. It can be 100% financed. In the event mortgage rates reduce after you’ve bought your new home, you can even refinance your USDA loan. This means you can lower your monthly debt payments by getting a lower interest rate.
Can I get a mortgage if I’m in debt?
So we’ve talked a little about the importance of having a low DTI ratio for the home buying process, and how it affects the types of loans you are eligible for. But you may be thinking, “I have a lot of credit card debt. Will I still qualify for a mortgage?”
Don’t fret! There are plenty of ways you can reduce your debt, including paying off more per month or consolidating the debt through a personal loan. Although you can apply for a personal loan through a financial institution, it will often result in a thorough check of your credit history. And if you don’t have the best track record of making payments on time or staying below a healthy credit utilization percentage, it can make the loan that much harder to get.
Luckily, you can also borrow money from family and friends. Pigeon provides a secure platform to do just that. Whether you need help reducing the surmounting debt, or buying decor for your new home, Pigeon provides a platform that makes it easier for your loved ones to help you achieve your goals. 🤝
The bottom line
Buying a home is a life-changing decision. Where you choose to live will affect where your kids go to school, what kind of people you meet, and how your money will be spent for the next few decades. You don’t want to buy a house that’s over or under your budget, but rather one that’s within a reasonable price range for you.
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