How Do People Afford Houses?

How do people afford houses? It might seem like an impossible task, depending on where you are in life. Especially when home prices have climbed so dramatically, the logical question is: how are people paying for homes worth half a million dollars? 

If you’re curious about how people afford houses - and you want to know the steps you can take to afford one yourself - then read on.

How to Afford a House: Start With Improving Your Credit Score

 Before you even start looking for homes on Zillow, the first step in affording a house will be improving your credit score. People often assume that if they have a large down payment, or if they receive credit card offers in the mail, then their score won't matter - but it does.

How much of a difference does good credit make? 

The average home in the U.S. costs $430,000 today, so for the sake of simplicity, we’ll use that number. According to Google’s mortgage calculator, a home buyer putting down 10% on a $430,000 loan would pay:

• 740-759: $3,091/month
• 680 - 699: $3,215/month
• 620-639: $3,424/month

Even on a monthly level, homebuyers stand to save hundreds of dollars by raising their score. Over the lifetime of the loan, that’s thousands. The lower your credit score, the more interest you'll pay each month due to a higher mortgage rate - which will lower your potential price range for homes.

It's a good idea to meet with a mortgage advisor or credit advisor ASAP so that you don't do something that accidentally lowers your score.

Many people, for example, think it’s a good idea to close their credit card accounts. Can’t use it if it’s not there, right? Wrong, though - credit bureaus don’t care if you have two open cards, or ten. They care about how you pay off your debt. 

Here are a few additional ways you can improve your credit and see results quickly:

• Automate your bills so that you never get behind a payment.
• Even if you can’t pay the entire amount, set it for more than the minimum payment, even if it’s only by $1. That gets reported as “above minimum payment” to the credit bureaus.
• Asking your credit card company to raise the limit on your card can improve your credit score - because it improves your credit utilization score.
• If your cell phone bill isn’t a part of your credit report - and you pay on time - add it via Experian Boost.
• Take a look at your credit report and check for inaccuracies. You can dispute errors.
• A service called Self allows people interested in building their credit score to essentially pay off their own loan. They pay Self every month in amounts as low as $25, and their payments are held in a certificate of deposit. Once they pay off the loan, they receive the money back.

For more info, read: Can I Buy a House with Bad Credit?

How do people afford houses when you need to put 20% down? Answer: they don't 

Over the last century the rising price of homes has far outpaced rising average wages. As a result, truisms from 30-40 years ago - when many current homebuyers' parents were buying homes - haven’t held up so well over the years.

The ‘20% down” adage is one of them. 

In fact, the average first-time home buyer only puts down 7%.

Sometimes it just makes more sense to put down less if it means getting out of the rental cycle sooner. Since home prices appreciate every year, saving up money can be pointless in some ways. You might save an extra $10,000 only to see home prices appreciate by that much anyway over the year it takes you to save that. 

Yes, you will have a lower monthly payment - and avoid PMI - if you save 20%. But the longer you wait to buy a home, the higher the selling price goes - pushing down your purchasing power. And of course, all your rent money goes towards your landlord's equity in the meantime - not yours.

“If you're doing the conventional loan you can put down as little as 5%, and if you’re a first-time home buyer in some cases you can put as little as 3% down, even conventionally,” explains mortgage advisor Casey Hansen.

Know ALL Your Loan Options

It’s a good idea to meet with a mortgage advisor so that you can discuss all your loan options in detail. Here are a few examples of what you might learn about:

• ARM loan. Adjustable rate mortgages have a bad reputation, but they can actually be a savvy choice for first-time home buyers. Many ARMs today allow you to lock in a lower rate than average for the first 3, 5, or 7 years - the rate will be set until the initial term is up (and then it will adjust). For someone investing in a starter home who plans to move eventually, seven years is often more than enough time. And if you don’t move? It isn’t the end of the world: you can always refinance if necessary and buy down your rate with points.
• Mortgage points. If you plan to live in your home for a long time - or eventually rent it out - you can buy down your rate with mortgage points. A mortgage point typically costs about 1% of your loan amount, and will lower your mortgage rate by .25%.
• A 2-1 buydown. Do you expect to finish paying off a car within the next two years - or will your career trajectory lead to a higher income soon? A 2-1 buydown allows for a lower initial mortgage rate for the first two years. Though it will come with a fee - and the rate will go up eventually - it can help you ease into your new role as homeowner.
• Programs and Grants (differ by locale). Most cities have programs specifically for low-income or first-time homebuyers. As an example, Philadelphia's Philly First program offers a home buyer assistance of up to $10,000 (or 6% of the purchase price, whichever is less) to help first-time home buyers.

Realtor Commissions: Don't Pay Them!

One thing home buyers might not realize is that agent commissions don’t come out of their pocket. It’s the home seller who pays for both the listing and the buyer agent commissions! Their advice is essentially free to you, so you should make use of it.

You’ll want to focus on finding an agent who best fits your needs. Great communication, organization, and experience negotiating should be at the top of your list if you want to get your home at a reasonable price. 

An agent who’s fully in your corner may find itemizations on the inspection report that weren’t on the disclosure form that can help reduce the selling price. An agent who’s only focused on closing the sale and moving on to the next one, though, might overlook small details like that.

Houwzer pays its agents a salary so that their top goal is client satisfaction - not commission bonuses. This can be important because an agent who relies on a commission bonus to pay their own mortgage has an incentive to suggest homes at the top of your budget.

An experienced agent can help you get a more affordable home by:

• Having an expert understanding of the local market, and finding under-valued homes that fit your “must-have’s”
• Finding houses with good bones with outdated fixtures you can improve over time
• Relying on their network to find promising leads
• Helping you identify the mortgage broker that will get you the lowest rate
• Knowing what the home is truly worth, so that you don't overpay
• Successfully negotiating repair money off the price if the inspection findings warrants it

Trading Up

In California, the median price of a single-family home has risen to nearly $900,000. Not surprisingly, many people wonder how the average person or couple can afford this. While average income is a bit higher in California, it’s not enough to account for this skyrocketing price. 

What many people do, though, is trade up. They start with what they can afford, and they can then use that equity toward their next home several years down the line. 

It doesn’t help, of course, that starter homes are less popular with builders in the U.S. as of late - while simultaneously being in higher demand due to both millennials looking for their first home, and baby boomers aiming to downsize. 

Still, even starting off with an apartment unit or condo - even if it’s not the first dream home that you envisioned - can help you access the first rung of the homeowning ladder.

Many major cities, such as Philadelphia, still have numerous properties available for $100,000 or less - typically because they are smaller (such as a condo), in a less desirable area, or because they’re a fixer-upper that needs a bit of handiwork. 

According to BankRate’s mortgage calculator, a $100,000 home loan with 10% down ($10,000) and a 6% interest rate has a total monthly payment of $675 before PMI. For many people, this is a very attainable goal and might even be lower than their current monthly bill.

Of course, this likely means that your home will not meet all the components of your “want list.” But by building up equity, you are one step closer to making an offer on your dream home in the future. 

So: How are people affording houses? To recap:

• Building high credit scores
• Putting down less than 20%
• Maximizing their loan options
• Using savvy Realtors
• Trading up

For Further Reading

• Should I Buy a House as a Single Person?
• Can I Use My 401k to Buy a House? (and if so - should I?)
• Zillow Pre-Foreclosure: Does it Mean I Can Buy This House?