The ATTOM data team is out with their 4Q21 home affordability report, linked below. A median U.S. home price of $317,500 is still manageable but getting less affordable as prices and mortgage rates rise. Lenders use something called a debt-to-income (DTI) ratio to determine your affordability. Here’s how it works and how to calculate home affordability.
To calculate a debt-to-income (DTI) ratio, lenders divide your total monthly bills — including costs on a home you’d buy — by your total monthly income.
Lenders must follow loan approval rules made by Fannie Mae and Freddie Mac, who serve as government-sponsored supporters of the housing market.
These rules allow lenders to approve loans with DTI ratios as high as 50%, which means you’d be spending 50% of your monthly income on housing and non-housing bills each month.
This is aggressive and not everyone would choose to do this, but the government-approved rules for lenders to calculate home affordability are more flexible than alarmist headlines (including my headline above!) suggest.
So, never let a headline dictate your home buying or overall financial strategy.
Now let’s calculate home affordability in terms you can understand.
Let’s say you want to use 5% down to buy a home in your area that’s at ATTOM’s national median price of $317,500. Here’s how the monthly payment would break down today:
– Mortgage payment (3.125% rate): $1292
– Mortgage Insurance: $191
– Property Taxes: $318
– Homeowners Insurance: $100
– TOTAL MONTHLY HOUSING COST: $1901
Let’s also say you have another $800 per month in student loan, auto, and credit card payments.
This means your total monthly housing ($1901) and non-housing ($800) bills are $2701.
Let’s also assume you earn the national average annual wage shown in the ATTOM report (via BLS) of $65,546. This translates to $5462 per month.
So we divide total bills of $2701 by income of $5462 to get a debt-to-income (DTI) ratio of 49.5%.
You can see that this feels a bit high: you’d be spending half of your gross income on bills. But we know that most lenders would be able approve this as long as you had high credit scores (in the 700+ range).
The rest is for you to decide if your budget could tolerate this. Maybe you’re getting a raise soon, so you know it’s worth the stretch. These are the considerations you can make once you know the math.
THE TAKEAWAY: All home pricing is local, and how to calculate home affordability is ALWAYS based on your individual profile — not headlines.
So it’s important to get with a lender instead of letting headlines dictate your strategy. Also, hopefully these notes help you calculate home affordability yourself.
Please comment below, or reach out to me directly with questions.