If you are looking to purchase a home, you may have heard of various rules to follow, such as not making big purchases or skipping a home inspection. However, according to Zillow, you will need to earn over $106,000 annually to comfortably afford a home. Anushna Prakash, a data scientist at Zillow, conducted the study and stated that the number has increased by 80% from 2020, when a household with a $59,000 annual income could afford a mortgage without exceeding 30% of their income. However, with the average U.S. household income now at $81,000, many potential buyers are falling short of the $106,000 needed.
The household income needed to afford a home varies by city, with Pittsburgh being the most affordable at $58,000 and San Jose/Silicon Valley being the most expensive at $454,000. Prakash explains that housing costs have risen significantly during the pandemic, while incomes have not kept pace. First-time home buyers are particularly impacted as they lack built-up home equity. Rising mortgage rates and home prices are also affecting sellers, who are less likely to want to sell in the current market, leading to limited supply and high prices. This makes it difficult for buyers to find an affordable home.
Buyers earning less than $106,000 are not necessarily locked out of the market. One option is to wait and save for a larger down payment, which can reduce the loan amount and monthly payments. Alternatively, buyers can explore more affordable areas where housing prices may be lower. Co-owning a home with friends or family members is another trend that can make homeownership more attainable. Incentives from sellers, such as covering closing costs or providing financing assistance, can also help buyers afford a home. Refinancing when rates drop is another strategy to reduce monthly payments.
Avoiding being house poor is crucial when buying a home, as it means spending too much of your income on housing expenses. While mortgage lenders have safeguards in place to ensure buyers can afford their loans, it is important for buyers to set their own budget based on what they are comfortable with. Financial preparation is essential in determining how much house you can comfortably afford. It is important to carefully review your budget and financial situation to understand the costs of homeownership. Analyzing trends in the housing market, interest rates, and affordability, as well as creating a comprehensive plan outlining your budget, location preferences, and financing options, can help ensure a sustainable purchase decision.