How Much Can You Spend with a Low Down-Payment Mortgage?

This is the question asked by an article in the International Business Times which points out that if you bought a property in the United States in 2015 then it’s likely that you are in your 40s, white and married.

Every year the National Association of Realtors compiles a profile of typical homebuyers and sellers in the United States and their most recent data confirms what most people already suspected. The majority of young people are not buying property.

It’s hardly surprising to learn the reason is a matter of finances. Last year the typical person hoping to buy a home earned $86,100, comfortably exceeding the national median income of $53,482. Saving for a down payment is a huge barrier for would-be homeowners and just recently the Bank of America introduced a new low down payment mortgage aimed at helping more families become homeowners.

In order to qualify for this, homebuyers must earn less than the Housing and Urban Development median income for their area. This can vary considerably, from $48,300 in Mississippi to $90,500 in Maryland. Mortgages can be up to $417,000 and the down payment could be as low as 3%. The bank is also partnering with the Self Help Credit Union which aims to provide counseling for homeowners struggling to keep up with their mortgage repayments, an action that is being commended by experts within the real estate and banking industries.

Although this latest mortgage product will be appealing to some people, it may not be the perfect choice for everyone who qualifies. It’s being recommended that buyers consider pre-purchase counseling in order to avoid ending up in a situation where they cannot afford their mortgage. First-time buyers do have to complete a homebuyer education program provided by the Bank of America but the article recommend seeing a third-party adviser who may be able to offer more objective advice.

Generally it’s suggested that you multiply your annual income by 2.5 to determine how much of a mortgage you can afford. Last year the typical homebuyer largely followed this advice with a median purchase price of $220,000 and an annual income of $86,100. The article also suggests working out your debt to income ratio which includes the total of monthly debts including car loans, credit card debt and student loans as well as a potential mortgage divided by your monthly income, pre-tax. While banks may allow borrowers to have a debt to income ratio of 43%, a more manageable rate is 30% or less.