If you don’t make a good living, raise your hand. Me too. After graduating from college, I purposefully chose a career path with minimal compensation. Even when I do have a job, wildlife biologists just do not make the same amount of money as software programmers. I work for myself at the moment.
Even worse, I owe a ton of money. I felt as though the deck was tilted against me and many other young people since we had higher debt loads and poorer salaries than we had planned for. It makes sense that, even if we wanted one, we couldn’t buy a home.
However, am I completely cut off from the home market? I was able to check to see if I can afford a home with the help of Credit Sesame’s tools.
What I discovered caught me off guard.
Here are some things you can do if you have a low income to determine how much house you can afford and some steps you may take to increase your ability to purchase a property.
How little do you make?
To get the most reasonable offers, first check to see that your income is accurately entered. To access the My Finances area, go to the Credit Sesame login page. On the left, you’ll notice a circular graph with the words “Your Gross Income” written beneath it. Check to see if it’s correct; if not, modify it.
I made the decision to test two scenarios: first, I entered only my income; second, I entered my household’s income, my husband and I included. Although my spouse recently went through a deed-in-lieu-of-foreclosure process and won’t be qualified for a mortgage for another three years, our family income is, of course, significantly greater. I wanted to find out what kind of mortgage I could obtain if I applied alone and what I would get if I waited until after my spouse became qualified for a mortgage because we would likely be making even more money at that point.
What kind of house can you afford?
You may discover how much of a mortgage you might be approved for once your income has been accurately entered. Scroll all the way down on the Borrowing Power tab. I can afford the following using only my present income:
Not bad for $150,729!
But is this a sound financial decision? Even if you can afford a large loan, that doesn’t imply you’ll have an easy time repaying it. According to experts, you shouldn’t spend more than 30% of your gross income on housing.
That amounts to a maximum $1,050 monthly payment given my meager salary. My monthly payment would be $953.68 using an online mortgage payment calculator and assuming a 3.5% down payment (the minimal amount for an FHA loan). This is slightly under the 30% mark. I could perhaps make the payment.
With this price tag, what kind of house am I able to purchase?
I regrettably reside in Fort Collins, Colorado. It’s a wonderful site. Everyone agrees. The reason behind the high cost of housing in this area. In March 2017, the median home price was $346,300, which is beyond out of my price range.
A short check on Zillow reveals that I have few local possibilities with a budget of $150,729 in my neighborhood. I have a choice between a little 500 square foot condo and a tacky, dilapidated trailer.
If I don’t like the houses I can afford, what are my options?
Fortunately, you still have choices if staying in a cramped hotel or tiny cell doesn’t appeal to you.
Continue renting and put money aside.
You may always keep renting. Work on accumulating some funds for a down payment in the interim. Because you’ll be taking out a smaller loan, it will lower your monthly mortgage payment and eliminate the expense of private mortgage insurance (PMI), which most lenders charge if you put less than 20% down on a home. Your cost may easily increase by more than $100 a month if you have PMI.
Get a cheaper apartment
If you have a flexible work or a highly marketable skill set, you can potentially relocate to a region with a cheaper cost of living. In general, places in the Midwest and the South are less expensive. Check out this fascinating map of housing prices around the nation. In other parts of the country, a mortgage of $150,729 can buy a pretty good house, but not in the tiny heat island that is Fort Collins.
I could afford a lot bigger house on a little income if I moved back to Traverse City, Michigan, where I grew up. Zillow displays a lovely 1,000 square foot home in the heart of town that is within my price range. But I’d prefer the 900 square foot log cabin on a lake in the middle of a forest that’s still only a short drive from town.
Look for alternative credit products
Also, you can look for flexible mortgage plans. For instance, through its HomeReady mortgage program, Fannie Mae provides mortgages to people with low incomes. They’ll allow you to obtain a loan with a down payment of as little as 3% (be careful with PMI, though), and because they’re open-minded about what constitutes “revenue,” you can include items like side-gig earnings or presents.
Get paid more
Finally, you may simply find a means to increase your income. Given that it will enhance your total financial situation, this is probably the greatest choice. Yet you’re right—easier it’s said than done. Yet, there are things you can do, such as asking for a pay increase at work, changing employment (if you can), getting a second job, or starting a side business.
To determine what salary you’d need to earn to buy the type of house you want, edit your yearly income under the My Finances page. For instance, when my spouse is once again qualified for a mortgage, our combined income will probably be greater than $109,000. If that proves out to be true, we’ll be able to afford a $490,736 mortgage and purchase a wonderful house in our neighborhood.
You constantly have choices.
If you completed this exercise, you might have been shocked by the size of mortgage you qualify for. You are neither a success nor a failure simply because you might or might not be able to buy the property you want right now. In the US, renting is frequently the better choice. Yet, after determining how much of a mortgage you can pay and whether that amount fits in with your financial objectives, only you can make that choice.
