You did it. You finally conquered the beast that is college. No more studying. No more homework. No more tests. You walked at graduation, took some once-in-a-lifetime pictures with your friends and family, and left the place you had called home for 2-5 years. Or perhaps tomorrow, you’ll be one of the 5,500+ graduates who will walk across the stage at the magnificent Husky Stadium as their family and friends applaud them. It will be the University’s 144th Annual Commencement Exercises.
Well now, after hopefully taking the summer off to enjoy your last free 3- month break of your life (most likely), you’ll be going into the full-time work force. Probably renting a house or apartment with friends or living at home to save money. Maybe you get a job that has a starting pay of $50,000-$60,000 per year. Going through college, something you kept hearing was how IMPORTANT the VALUE of OWNING a home is. So now you’re thinking to yourself, “How am I ever going to be able to afford a home in this city?” After all, the average price of a home in King County is around $620,000 and that is not a small price to pay. Plus, if you’re like most college graduates, you’re swimming in some amount of debt, whether that’s in the form of student loans, car payments, or credit cards. And if you are anything like me after graduation, you have no idea what it takes to own a home in today’s market. You just assume it’s a long way off.
Now, every situation is different, so there is no blanket statement that can answer this kind of question. But I will say this: in most cases, it’s closer than you think.
Like most things in life, there is a process to buying a home, and that process usually starts with getting pre-qualified. When pre-qualifying someone, a Loan Officer reviews the following pieces of the scenario:
Gross Monthly Income: how much you make each month before any taxes
Debts: credit cards, student loans, car loans, medical bills, etc.
Credit: not just your score, but how often you pay on time, how many lines of credit you have open, etc.
Those are the 3 main factors most Loan Officers look at to determine what kind of client you will be and what kind of mortgage you can afford. Mortgage companies will use a combination of these factors that is called DTI (Debt-to-Income) as a focal point in determining your ability to qualify for a loan. This involves taking all your debt you own in a month and dividing it by all the gross income you make in that month. Let’s look at a hypothetical example of this:
You make $55,000 per year. That’s $4,583 per month. Let’s say you also pay around $500 per month in different debts (just your minimum payments for student loans and credit cards in this case) and you have a credit score of 740. Where DTI comes into play, is that in most cases, loan officers can pre-qualify a potential home buyer with up to a 50% Debt-to-Income ratio. Right now, at just $500, your DTI is 10.9%. That means there’s about 40% more that you can afford, and you can hypothetically get approved for close to $1,784 in housing payments. A $1,783.43 per month housing payment (which includes real estate taxes, home owner’s insurance, and mortgage insurance) with other outstanding debts of $500, puts you at a DTI of 49.82%, just under the max of 50%. With this monthly payment, and an interest rate somewhere close to 4.5%, you’re looking at getting approved for a $275,000 home. Now before you jump out of your seats thinking about using 50% of your paycheck towards house bills, think about this. What’s the average rent for a house or apartment within a 10-mile radius of Seattle. It’s currently considered to be about $2040 a month, maybe if you go in with some friends on a house you fall around $900-$1100. And that’s to rent the place. So for an extra $800 max a month you could own a condo or home – and for those out there paying $2040, it’s going to cost them less to own! Now, there is always going to be up-front costs when buying a home, which includes things like down payment (minimum of 3%, so $8,250 in this case) and other pre-paid closing costs that are due at signing (usually around $8,000), which results in around $17,000 upfront. That’s a lot of money for a new grad.
So now you’re really not interested. $17,000?? Not happening. You’re also thinking, “Okay, even if all that math checks out, a $275,000 house or condo is A. not going to get me much considering the housing market in Seattle and B. is always hard to find a quality place for a good deal.” And this is true. Getting pre-qualified and pre-approved for a home under $300,000 won’t go that far because of where we live. But the point of this wasn’t to convince you to buy a home today; it was to show you that it isn’t as difficult as you once thought. Yes, maybe (probably) right now you don’t have the capital to spend $17,000 plus almost ~$2,000 per month on mortgage payments. I know I don’t. But what about next year? You’ve now been making $55,000 for a year, with minimal debt. Do that for two years, and now making a $20,000 payment doesn’t sound so daunting. And now, you have less debt because you’ve paid off more of your loans, and your credit score is higher, and maybe you got a promotion and a slight raise. Now you can afford a $400,000 home. Just TWO years out of college. You’re in your early-to-mid-20’s and you already own a home…Didn’t see that coming did ya?
Obviously, there is a lot more to be explained. But I’ll leave that for another post. If you want to learn more, about the numbers, about the benefits of owning property and not renting, or just about anything home-buying related, please don’t hesitate to reach out to a Loan Officer.