There's an old real estate joke that everyone wants to live the American Dream and buy their bank a house. Living that dream has become even harder in the past few years thanks to that troublesome housing bubble we lived through and banks have tightened up the lending rules. We're covering this issue from all sorts of angles as Curbed University 2013 gets underway, but what better way to start things off than with the most important question: how to figure out how much you can afford. Click through for the skinny on what the lenders will look at first: size of the downpayments and Debt-to-Income ratios.
Downpayment. The biggest thing a first timer needs to worry about is how much money they can put toward a downpayment. It used to be, way back when, that people would aim to put down 20% of the asking price. But in the DC area prices have gotten so high that this trend is not as frequent anymore. For example, the median sales price for DC in January 2013 was $343,200 which would mean buyers have to have $68,640 just for the downpayment. Since a buyer has to absorb other costs in addition to that, they would need even more to buy a home (we'll cover those other fees in later Curbed University posts).
The latest statistics Curbed could find for DC were in a Lending Tree blog post from 2011 that indicated DC averaged 13.5% for downpayments (and the District is in the top five in the country). A couple of extra pieces of information:
1. A buyer has to disclose if someone—say their parents—gives them money to come up with the downpayment. Banks will sometimes see that gift as a red flag that the buyer may not be as financially stable as they think.
2. The Federal Housing Administration (FHA) backs loans for people who meet the lower income requirements but the absolute minimum amount for a downpayment is 3.5%. These are more common than ever but require more paperwork and not every house qualifies for FHA loans.
3. There are some programs that may help people who can't come up with enough for a downpayment. In DC it is the Home Purchase Assistance Program. In Virginia the Virginia Housing Development Authority may be able to help. Does anyone know of one for Maryland? Please leave it in the comments.
Debts and Income. After a buyer has figured out how much they can gather together for a downpayment they then to figure out how much wiggle room is in their monthly budget. This is usually called the Debt-to-Income Ratio and involves simple addition and subtraction. First add up how much actual money comes your way each month after taxes. Then subtract all the regular debits (car payments, student loans etc.) and then subtract even more to cover the standard expenses (groceries, gas, Metro). Finally, hopefully, there should be money left over. That, plus what you currently pay in rent, is what you have to play with when it comes to a monthly mortgage payment. To figure out your Debt-to-Income Ratio simply divide the amount of debt by the amount of income. And keep the following points in mind:
1. There isn't a magic Debt-to-Income Ratio that lenders want to see, but typically they get wary the more it gets over 30-35%.
2. This is only slightly less important than having a good credit score. Lenders need to know that a buyer will be able to make the monthly mortgage payment every single month so they look carefully at how much cash, real hard cash, someone has in their monthly budget leftover after all their debts are paid.
Any more crucial facts that apply to the general population? Please add them to the comments or send them in to the tipline. There was also an online chat yesterday on the Washington Post's real estate blog that touched on some first-timer questions.