Home ownership is becoming increasingly out of reach for the average American, even if you earn an above average salary.
The current spring housing market has been described as “a nobody’s market” as sellers cling to their homes for fear of losing their low interest rates and buyers simply cannot afford the sky-high property prices. houses.
“Affordability conditions will need to improve significantly, likely via lower house prices and lower mortgage rates, to see buyers returning to the market en masse,” said Hannah Jones, data analyst at Realtor. com, at MarketWatch.
And while you can wait for market conditions to change, there are other ways to get into real estate that don’t necessarily require a six-figure salary.
Run the numbers
Jones crunched the numbers and discovered that to afford a $500,000 home, you had to earn more than $140,000 a year.
To arrive at this sum, she started with this prize of $500,000. Assuming you have a 10% down payment of $50,000, lock in a 30-year fixed rate mortgage at 6.32%, and pay tax and an insurance rate of 1.72%, your monthly payment will total $3,508.
Now, since most lenders require you to reduce your housing expenses to around 30% of your gross income, Jones calculated that you would need to earn $140,312 a year to meet this goal.
You might say $500,000 sounds like a lot of house, but consider that the national median home price for active listings jumped to $424,000 in March, according to Realtor.com.
Using the same calculation above – a 10% down payment, a 30-year fixed rate mortgage at 6.32%, and a tax and insurance rate of 1.72% – your monthly housing costs would be of $2,969. To afford it, one would need to earn around $118,760 per year.
That’s a far cry from the national average salary, which is $58,563 per year, according to ZipRecruiter.
If these numbers seem exaggerated to you, here are three simple tips for getting started in real estate.
Save a big down payment
A sufficient down payment is often the biggest obstacle standing between you and buying a home.
A decently sized down payment will lower your monthly mortgage payment and protect you from additional costs, like private mortgage insurance (PMI), which lenders typically require if your down payment is less than 20% of the purchase price of your home.
That being said, saving for a substantial down payment is easier said than done. A 20% down payment on a $500,000 home would amount to $100,000 – in cash – that few people just have lying around.
If you’re not sure where to start, a savings goal calculator can be a great resource here. Not only can this serve as your roadmap to achieving your financial goals, but you can also break your goal down into smaller, achievable steps to keep you motivated.
Alternatively, if you find it difficult to exercise self-discipline when budgeting and managing your money, automating your savings by diverting a portion of your earnings (if your employer pays by direct deposit) or setting up recurring transfers to a savings account can help you stay on track. .
If you’re a few years away from buying a home, but you already have a good amount of money for your down payment, you can lock some of that money into a bank certificate of deposit (CD) and take advantage of the current high rates.
And remember, when you’re buying a home, you not only need cash for a down payment, but you’ll also need cash to cover closing costs, appraisal and inspection fees, and legal fees. upfront – all of which can add up to a significant sum.
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Get the best possible loan
Without a mega salary or a big financial windfall, like an inheritance, it’s unlikely you’ll be able to buy a house without getting a loan.
For homebuyers and those looking to refinance their current mortgage, there are several types of mortgages to choose from.
Some loans, like FHA, USDA, and VA loans, are federally backed and designed for low-to-moderate income Americans, rural residents, and veterans, while others are generally only available. for borrowers with a certain income and a strong credit score.
Although you won’t find the same standards with all lenders, the better your credit score, the better your home loan is likely to be.
You can improve your score by doing things like paying your bills on time, keeping your credit usage low, and checking your credit report for errors. This should open up opportunities for better loan options.
A higher credit score can help you qualify for a lower interest rate on your mortgage, which could save you thousands of dollars in interest over the life of your loan.
No matter what type of loan you qualify for, you should never accept the first quote you are offered. Experts recommend comparing at least three different offers before deciding on one.
Skip the buying process completely
If buying a home isn’t an option (right now), you might want to consider investing in real estate another way.
Prime commercial real estate has outperformed the S&P 500 over a 25-year period – and until recently only the ultra-rich with millions to invest could get in on the action. But new platforms have opened up opportunities like this to regular retail investors.
Another great way to profit from the real estate market is to invest in a real estate investment trust (REIT). REITs are publicly traded companies that own income-generating real estate like apartment buildings, shopping malls, and office towers. They collect rent from tenants and pass it on to shareholders in the form of regular dividend payments.
If you want to dive into real estate investing, you can find an option that best suits your needs by answering a few quick questions with Moneywise’s investment finder tool.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.