In today's red hot market, it's only natural to worry about home affordability. An industry expert shares her tips for stressed homebuyers.
Buying a home these days can feel like a rigged game — one that’s getting harder and harder to play as home rise and affordability suffers.
Home prices were 20% from same time last year in the first quarter of 2022, according to CoreLogic, and some cities are feeling more than others. From the beginning of the pandemic (March 2020) to March 2022, home prices are up 37% nationwide and four markets have more than 50% appreciation:
- Phoenix: 59%
- San Diego: 55%
- Tampa: 53%% rise.
- Seattle: 51%
And even outside major urban areas, it’s common for houses to go under contract within hours of being listed.
It’s no wonder that in a new survey from U.S. News & World Report, 72% of Americans say they’re worried about home affordability.
But while buying a home can be tough right now, it’s still doable. Get started by using this mortgage affordability calculator to get a sense of your target price range.
And with mortgage rates still relatively low, folks who are ready to become homeowners are going to want to stick with their homebuying plan, even if it takes a little longer to find that perfect home than expected.
What's in this Article?
The pandemic is over(ish). Why are home prices still rising?
In 2020, the demand for mortgage-backed securities (MBS) rose sharply amid the Covid recession. MBS are relatively low-risk investments, so investors flocked to them during the months of economic uncertainty.
High MBS demand drove mortgage interest rates to historic lows, which motivated homebuyers to buy last year and lock in the low rates. At the same time, the sudden switch to remote work freed many people to move away from their offices, giving them more homebuying options than ever.
The inventory squeeze, combined with high prices, has made navigating the housing market tricky for both buyers and sellers.
Buyers may need to make multiple offers before they’re able to secure a house. Sellers, meanwhile, may find themselves couchsurfing if their home sells faster than they can find a new one (which is not unlikely in the current market).
“If houses are selling rapidly in your area and getting good prices, you might want to start looking for a house before you put yours on the market,” said Beverly Harzog, credit card expert and consumer finance analyst at U.S. News & World Report.
You’ll only want to do that if houses in your neighborhood are selling fast and you’re confident your home will as well, she said, especially if you’re concerned about being able to afford a new mortgage while waiting for your current home to sell.
But she noted that she’s heard of several people needing to move in with family temporarily because their home sold so quickly, they didn’t have time to get an offer accepted on a new one.
I’m on a tight budget. How can I compete if I don’t offer above asking?
Offering above the asking price has become the norm, especially if you’re buying in an in-demand area.
If you’re worried about not being able to make a competitive offer, there are some ways to improve your chances of getting into a home soon.
Improving your homebuying power
- Look for a less expensive home. Reconsider your must-haves. Can you work with a smaller square footage? Are you willing to look in a sleepier or less central neighborhood? You might find a more affordable home — one that allows you to offer above asking based on your budget — if you compromise on some features.
- Save up for a bigger down payment. Take a look at your budget. Could you save substantially more money in the next few months if you do some serious belt-tightening? More money in the bank means you may be able to go above asking price because you’ll have that cash buffer. It might be worth saving for a few more months and then trying to buy.
- Improve your credit score. “This is going to increase your purchasing power,” Harzog said. “When you have a great credit score, you’re going to get a better rate. That means your monthly payments will be lower. So you might be able to afford a better house.” Paying down debt can also improve your credit score and help you qualify for a bigger loan.
- Buy a fixer-upper. OK, it may not look like your dream home at first. But you can use a 3.5% down FHA 203k loan to purchase a home and finance the renovations.
- Ask family or friends for a gift. If a friend or relative has offered to help you out financially, you may want to suggest they give you a financial gift toward buying your home. They can cover your down payment or contribute to your home savings fund so you have more available to make a competitive offer.
I think I missed my chance by not buying earlier. Will home affordability ever return?
Harzog’s advice to homebuyers experiencing anxiety over home affordability and rising interest rates? “Don’t panic.”
Just because you’re finding it more difficult to buy than you expected doesn’t mean it’s not going to happen.
“The market is hot, but you really have to look at whether you can afford to buy a house right now,” Harzog said. “Are you prepared to buy a house and compete with real estate investors and others who can go way over listing price for the area you want?”
The key is to stay within your budget and keep your long-term goals in mind. Homeownership can be a great way to build wealth. However, you don’t want to take on a mortgage that will quickly become unmanageable.
According to Harzog, panic-buying could cause you to buy a house you can’t really afford. If home prices in your chosen area are way out of your price range, or would strain your budget to the point of breaking, you may want to wait on buying while you raise your credit score and save a larger down payment.
Although waiting can be difficult, “you’re going to feel like you’re in a better position financially to compete,” she said.
Patience is key
But let’s say you’re ready to move on a purchase today; you just can’t find anything in your price range or your offers aren’t being accepted. There is still hope, according to Harzog.
“I think at some point … usually there’s some kind of bubble and things come back to reality, at least a little bit,” she said.
Harzog cautioned that rushing to buy a house can drive you to not only take on more than you can afford, but also to make so many concessions. You end up with a house you don’t really like or want.
“I don’t think anyone ever gets 100% of what they’re looking for, but you should be able to get most of what you’re looking for,” she said.
Buying a house you don’t really want or that doesn’t meet your needs could cost you if you decide to sell it within just a few years to upgrade or you have to make costly renovations.
It’s important to buy when you find a home that is within your budget and will accommodate your lifestyle needs for at least the next several years.
So, keep at it. And while you’re searching, stick to your budget, pay attention to your credit score, and keep your debts low. All of those factors can help you qualify for a mortgage when the time comes.
Home affordability FAQs
Income is just one part of the affordability equation — albeit an important one. Lenders will consider your gross monthly income, your debt-to-income ratio, your credit score, and other components when deciding how much to approve you for. Your best bet? Apply for preapproval to find out your borrowing power.
It’s difficult to say how much income you need to buy a particular home price, because income is only one aspect of eligibility. You can have a six-figure salary and still not qualify to buy a $400,000 house if your debt-to-income ratio is high and your credit score is low.
A lender will consider your income, debts, and credit history when making a lending decision, so it’s a good idea to apply for a preapproval and get some hard numbers you can plan around.
How much you can afford depends on a number of factors: your salary, credit score, debt-to-income ratio, and down payment, among other elements.
Use this mortgage affordability calculator to get a better sense of your homebuying options.
Take the next step
If you’re ready to buy a home, stop scrolling the headlines and dive in. Your first step is to get preapproved with a lender so you know how much home you can afford. Then you can set your budget accordingly.
Once you know how much you can borrow, you can look for houses below that amount. Leave yourself some extra room to go above asking and make a winning offer.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.