You work hard to earn your money, and naturally, you want it to go as far as possible, especially when making larger investments. Knowing how much you can afford is important, whether you’re purchasing your first home or upsizing.
Navigating today’s fluctuating real estate market as a homebuyer can feel like trying to get through a maze blindfolded.
The team at Daybreak is passionate about empowering homebuyers through education to make them feel comfortable throughout the homebuying journey. Our experts have invaluable local real estate market knowledge.
By understanding the elements that affect your homeownership affordability, you can position yourself to afford the best home possible while protecting your financial future.
Understanding Homeownership Affordability
How much home you can afford goes beyond your ability to make monthly mortgage payments. Analyzing your homeownership affordability should take a broad, all-encompassing assessment of your financial situation to ensure you and your family don’t overcommit to a home you can’t afford.
To build a general estimate of your homeownership affordability, you can use the 28/36 rule:
- 28% (or less) of gross income should be devoted to housing
- 36% (or less) of gross income should be devoted to repaying debt
If you have significant debts, consider paying them down before you start the homebuying process. This will reduce your financial obligations and set you up for successful homeownership.
Saving for a down payment is attainable if you take the right steps. Start by assessing your financial situation and how much you need to save to get a favorable loan. Easy tips for saving for your down payment include cutting unnecessary or luxury expenses, increasing your income with a side hustle, and seeking grants.
Down Payments: Your First Step
Your journey to homeownership starts with the pivotal step of saving for a down payment, and the size of the down payment you make impacts how much home you can afford.
According to the National Association of Realtors, the average down payment for first-time homebuyers in the U.S. is around 6% of the home’s purchase price, jumping up to 17% for repeat buyers. Based on collective data, all homebuyers’ average down payment amount, regardless of location or age, is 13%.
The average home price in Utah in 2023 was $505,200, with a 13% down payment of $65,676. Compare that to California, with the highest average home price of $706,000, with a 13% down payment of $91,780.
The Role of Mortgage Rates
Mortgage rates play a significant role in determining affordability for homeownership. Even slight fluctuations in rates impact monthly mortgage payments. But with an understanding of how these rates work, you can make them work in your favor by taking advantage of market trends and taking a long-term investment approach.
Local mortgage rates in Utah rose in 2022 but are starting to level out. Experts are projecting a trending decline throughout 2024. However, interest rates shouldn’t keep you on the sidelines of the homebuying field. Many builders in the Daybreak community offer limited-time incentives that may help you reduce your mortgage rate and increase your home-buying power.
Exploring Loan Options
With various loan options available to homebuyers, it’s important to understand each one’s pros and cons before signing on. The most common loan options are FHA, VA, and conventional loans.
An FHA loan typically uses a 31/43 affordability rule related to a borrower’s debt-to-income limits. This model suggests that monthly mortgage payments should be no more than 31% and monthly debts should be less than 43% of the borrower’s pre-tax income.
FHA loans usually allow small down payments and lower credit scores if the borrower meets certain requirements. If your credit score is 580 or higher, the lowest down payment you can secure with an FHA loan is 3.5%. These loans are restricted to a maximum loan amount, and most require an upfront insurance premium to be paid as part of closing costs. Some FHA loans may also require an annual mortgage insurance premium in your monthly payment. All of these fees will impact your affordability.
VA loans are available for veterans and active military members when certain borrower criteria are met. These loans offer valuable and flexible benefits, like not requiring PMI premiums and having no down payment requirements. VA loans require an upfront funding fee to be included in the closing costs.
Conventional loans of 5% are available to borrowers with a credit score of at least 620. Freddie Mac reported that 20% of borrowers with conventional loans paid a down payment of less than 10%.
In addition to FHA and VA loans, more than 2,000 down payment assistance programs are available to homebuyers in the United States. USDA loans, for example, are zero-down-payment mortgage loans for buyers purchasing homes in eligible towns and rural areas. USDA loans do not require borrowers to pay PMI and are guaranteed by the US Department of Agriculture.
Other opportunities to increase your affordability include down payment grants, federal income tax credits, and Mortgage Credit Certificates (MCCs). You may also be able to withdraw up to $10,000 from your traditional Roth IRA to buy or build a new home.
Builder Incentives and Programs
Some home builders offer special incentives and programs for homebuyers that provide helpful opportunities for savings.
Homebuyers purchasing at Daybreak may be eligible for a range of builder incentives. If you’re unsure of what offers are available, consult your home builder or agent.
Utah-Specific Homeownership Programs
Utah offers a range of state and municipal homebuying assistance programs, from down payment assistance to favorable interest rates.
Through S.B. 240, the Utah Legislature is offering assistance for first-time homebuyers. This program offers up to $20,000 in assistance that can be used toward your down payment, closing costs, or a permanent interest rate buydown on qualifying loans priced at $450,000 or less. This program is administered by the Utah Housing Corporation. Buyers must have lived in Utah for at least one year before applying to qualify.
Other assistance programs offered by the Utah Housing Corporation include FirstHome for first-time homebuyers with a credit score of 660 or lower, HomeAgain for first-time buyers who want more flexibility in purchase price guidelines, and Score for people with credit history challenges.
How much can you afford? A Closer Look
A number of crucial factors will determine how much home you can afford. These include:
- Annual Income
- Monthly Debts
- Down Payment
- Debt-to-Income Ratio (DTI)
- Interest Rate
- Loan Term
- Property Tax
- Homeowner’s Insurance (HOI)
- Private Mortgage Insurance (PMI)
- HOA Dues
- Future Expenses
- Lifestyle Considerations
Income, debts, and down payment are the most impactful factors in determining how much home you can afford. The interest rate you qualify for will also impact your monthly mortgage payment.
Annual income is calculated based on the total amount earned the previous year before taxes and deductions. This number can be found on your tax documents. If you plan to sign with another borrower who will contribute to the mortgage, combine your annual income to reach a total annual income.
Monthly debts refer to ongoing, monthly expenses like car payments, student loans, insurance payments, minimum credit card payments, child support, etc. To reach a total, combine all monthly debts for all borrowers.
The amount of down payment you can secure and pay upfront will impact your monthly mortgage responsibility. Most home loans require a down payment of at least 3%, with 20% ideal for a manageable monthly liability.
Your debt-to-income ratio (DTI) is calculated by dividing your total monthly debts by your gross monthly income. Lenders use DTI to evaluate your ability to manage monthly payments and repay the money you borrow on the loan.
The interest rate is the amount a lender charges a borrower for taking out a loan. It is typically represented as an annual percentage of the loan balance. As the borrower, you will make payments (with interest) to the lender over a set period as determined in the loan until the money is repaid in full. The national average rate, credit score, and the amount of your down payment determine the interest rate.
The loan term refers to the agreed time to repay your home loan. The most common mortgage loan term is 30 years, but different terms are available.
As a homeowner, you will pay annual property taxes based on the property’s assessed value or purchase price. Property taxes can vary depending on the state, county, and municipality of the home. Salt Lake County, home of Daybreak Utah, boasts the sixth-lowest property tax rate in the country at 0.75%.
Homeowner’s insurance (HOI) is property insurance covering private residences. Most lenders require borrowers to have HOI to obtain a home loan. The cost varies based on the insurance provider, location, type of coverage, and any discounts you qualify for.
Most lenders require private mortgage insurance (PMI) for down payments below 20%. PMI protects the lender against losses from a borrower defaulting on a mortgage loan.
Homeowner’s Association (HOA) dues apply only to certain communities, usually condominiums and townhomes but sometimes single-family homes. HOAs are governed by residents and other officials and are designed to help maintain neighborhood amenities, like parks, pools and trails.
The mortgage calculator on DaybreakUtah.com will allow you to consider all of these factors when determining how much home you can afford.
Mortgage Calculator: A Handy Tool
Daybreak’s mortgage calculator is designed to estimate the total purchase price of the home you can afford and outline your monthly mortgage payments. This will give you an idea of how much you will need to save and how your monthly expenses will change should you secure the home.
To estimate your home affordability with our mortgage calculator, you will need your total annual income and monthly debts for all borrowers. You can adjust the down payment amount based on how much money you can put down in one sum.
Your total monthly payment
You Can Afford a Home in Daybreak
To ensure you purchase a home that you will love for years to come, you need to understand how much you can afford now. Explore new homes at daybreakutah.com/find-a-home/ to see a range of homes, from townhomes to estate homes and everything in between.
Approximately one in every six new home sales in the Salt Lake Valley happens at Daybreak. Join the other homebuyers who have chosen to call Daybreak their home and experience all that our thriving, growing community has to offer.
*Content contained in this blog post is provided as informational only. Please consult with a trusted expert for individual financial planning.
