Posted in: Buying a home, First time homebuyer tips, Getting a mortgage

Think you can’t afford to buy a home? Think again

Home affordability tips

For many would-be buyers, the last decade has made The American Dream just that — a dream. But with today’s low interest rates, new down payment options and rapidly rising rental costs, homeownership is fast becoming a budget-friendly option once again. Below, we outline how today’s changing market means it’s time for Generation Y to enter the market at last.

Renting is now twice as expensive as buying

First, we let’s talk about the rising cost of rent. According to this recent study, homeowners across the country spend about 15 percent of their total income on their monthly house payment — not including insurance and taxes. Meanwhile, renters across the country pay 30 percent of their total income on monthly rent. That means that, on average, renters pay two times more to live in a property that doesn’t offer them any long-term financial security.

Saving for a down payment can take less than a year

Of course, as rent becomes more expensive, many would-be buyers find it difficult to put money away for a future down payment. If you’re a frustrated renter who thinks buying is far off, know that 69 percent of first-time buyers were able to save for a down payment in less than 18 months and 50 percent of buyers said they did so in less than one year.

Many would-be buyers state that they cannot cut anything out of their already tight budgets. To start saving, think of the niceties you allow yourself — everything from eating at restaurants to buying expensive coffees, to electronics purchases and annual vacations. These are the kinds of elective activities and purchases you should put a cap on as you save for a down payment. By creating a new, stricter budget, even the most challenged saver can find new ways to put money away each month.

New down payment options as low as 3 percent

Many would-be buyers have been frozen out of the market due to the difficulty of saving for a down payment, but new loan options may make it easier for this faction to purchase a home soon. Fannie Mae and Freddie Mac just announced that they will approve mortgages with down payments as low as 3 percent, provided the borrower has a credit score of 620 or higher, can offer full financial and income documentation and receives homeownership counseling.

The mortgage giants have stated that these loans are specifically meant for first-time buyers who can pay a monthly mortgage but have not had the time and means to save a large lump sum for a down payment. This is music to the ears of many young renters, who find that they are paying much more in rent than they would in monthly mortgage costs.

Meanwhile, government-backed loans are also becoming more accessible and affordable for first-time buyers. The Federal Housing Administration, which backs FHA loans, requires a 3.5 percent down payment, and they recently reduced annual mortgage insurance premiums from 1.35 percent to .85 percent. This reduction will lead to a savings of about $80 per month for the average FHA borrower.

Starter homes are smaller homes

Just ten years ago, we saw the rise of the “McMansion” across the suburbs, but today’s first-time buyers have more modest taste. A study from the National Association of Home Builders shows that buyers under the age of 33 are purchasing smaller, older and less expensive homes. In fact, 69 percent of homes purchased by millennials were less than 2,000 square feet. Eighty percent spent less than $250,000 on their home, while 50 percent spent less than $148,500.

Even as home prices have risen over the last few years, it’s still possible for younger buyers to find smaller homes that meet their needs. Plus, while the early 2000s were all about competing over the largest home, the reset of the market correction has made homeowners more conscious of space, price and finding the right fit for their family rather than competing for the biggest castle.

Low interest rates are expected to rise gradually this year

Low rates are critical for first-time buyers, as an increase of even 1 percent can greatly affect a buyer’s purchasing power in the long-term.

For example, if a homebuyer with a 10 percent down payment is approved at 4 percent on a 30-year fixed conforming loan for a $200,000 house in Fridley, MN, their monthly mortgage payment would be $860. If the interest rate increased to just 4.5 percent, their monthly mortgage payment would increase to $1,120. That’s a difference of $1,200 annually and $38,000 over the life of the loan.

As you can see, the easiest way to increase your buying power is to purchase with a low interest rate. These rates have been kept intentionally low for the last few years in an attempt to drive buyers back into the market. As we stated in our 2015 predictions, we believe that these rates will continue to stay low, with a potential uptick later in the year (to around 5 percent).

The best time for you

With rent rising and market conditions becoming more favorable for younger buyers, it’s true that this is an ideal time to buy for many first-time buyers. Still, it’s important to work with a local specialist and home mortgage consultant who understand your personal finances, lifestyle and budget. Reach out by phone, email or chat today to get connected with the team that will help you determine if it’s the right time for you to buy a home.

Join over {{'43232' | number}} subscribers

Status Definitions

For sale: Properties which are available for showings and purchase

Active contingent: Properties which are available for showing but are under contract with another buyer

Pending: Properties which are under contract with a buyer and are no longer available for showings

Sold: Properties on which the sale has closed.

Coming soon: Properties which will be on the market soon and are not available for showings.

Contingent and Pending statuses may not be available for all listings