"Debt certainly isn't always a bad thing. A mortgage can help you afford a home. Student loans can be a necessity in getting a good job. Both are investments worth making, and both come with fairly low interest rates."
-- Jean Chatzky
Chatzky is right -- certain kinds of debt offer more upside than downside, and most of us do want a good education and a good home. Still, not everyone is up to buying a home right now. Here are four reasons you may not be able to afford a home. Three are largely under your control and one isn't.
Image source: Getty Images.
You have no emergency fund
According to a 2016 survey by Bankrate.com, fully 28% of respondents had no emergency savings at all and another 18% had less than three months' worth of living expenses socked away. When you add in the 16% who had between three and five months' worth -- still insufficient for most people -- it suggests that more than 60% of all Americans are woefully unprepared for unexpected financial trouble.
If you don't have an emergency fund stocked with six to nine months' worth of living expenses (including housing, food, transportation, utilities, insurance, taxes, and more), you probably shouldn't be thinking about committing to significant monthly payments for a mortgage. Emergencies may seem unlikely to happen, but a Pew Charitable Trusts study suggests that six out of 10 American households experience a significant financial shock each year (most often it's an income reduction or costly car repair), while a different Bankrate.com survey found 63% of Americans saying they can't handle an unexpected $500 car repair bill.
Image source: Getty Images.
You are carrying a lot of high-interest debt
Next, if you're carrying a lot of debt -- especially high-interest debt, you're not the most promising homebuyer. That's because while mortgages these days can be had for less than 5%, many credit cards are charging their customers 25% or more annually on revolving balances. If you've got, say, $36,000 in credit card debt on one or more cards charging you 25% annually, you're looking at about $9,000 in interest payments per year -- or roughly $750 per month. Most people would find it hard to add a mortgage payment to that. High-interest debt can quickly sink you, if it's not paid off and is allowed to grow. It deserves to be a higher financial priority than buying a house.
Besides, lenders may not approve your mortgage application if you're carrying what they deem to be too much debt. (You may find this out when trying to get pre-approved for a mortgage.) Lenders don't want you to owe too much relative to your earnings, as that could make you a shakier borrower, so they pay close attention to your debt-to-income ratio. To calculate your debt-to-income ratio, divide the total of all your monthly debt payments (from car loans, student loans, credit card debt, and so on) by your gross monthly income. To qualify for most mortgages, you'll want your debt-to-income ratio to be no more than 43% and, ideally, significantly lower.
Your credit score is poor
If you have a poor credit history and a low credit score, you're not going to be offered the best mortgage rates by lenders. And if you're buying a house with a high-interest rate mortgage, you'll have high monthly payments that will likely shrink how much house you can afford to buy. The following table shows what kind of difference a strong score can make. It reflects recent interest rates for someone borrowing $200,000 via a 30-year fixed-rate mortgage and makes clear how much you might save by boosting your score.
|
FICO Score |
APR |
Monthly Payment |
Total Interest Paid |
|---|---|---|---|
|
760-850 |
4.022% |
$957 |
$144,653 |
|
700-759 |
4.244% |
$983 |
$153,944 |
|
680-699 |
4.421% |
$1,004 |
$161,442 |
|
660-679 |
4.635% |
$1,029 |
$170,611 |
|
640-659 |
5.065% |
$1,082 |
$189,377 |
|
620-639 |
5.611% |
$1,105 |
$213,836 |
Data source: MyFICO.com, as of mid-March 2017.
The difference between a score of 650 and 750 can amount to $100 per month. A glance at the following table is a good reminder that being able to pay $100 or $200 more per month can make a big difference in how much house we can afford to buy.
|
Home Price |
Loan Amount |
30-Year Monthly Payment at 4.5% |
|---|---|---|
|
$200,000 |
$160,000 |
$811 |
|
$250,000 |
$200,000 |
$1,013 |
|
$300,000 |
$240,000 |
$1,216 |
|
$400,000 |
$320,000 |
$1,621 |
|
$500,000 |
$400,000 |
$2,027 |
Data source: Bankrate.com online calculator.
Image source: Getty Images.
Houses have just gotten too pricey
These reasons for why you might not be able to afford to buy a house now are largely within your control. You can spend a year or two beefing up your credit score by paying bills on time and paying down debts. Paying down debts will also improve your debt-to-income ratio, making you more attractive to lenders. And establishing a healthy emergency fund can protect you from financial disasters. But not every factor related to whether you can afford to buy a home is under your control. Here's a major deal-breaker for many would-be homebuyers: homes have simply gotten too expensive in many housing markets.
According to research by ATTOM Data Solutions, about a quarter of U.S. housing markets are less affordable now than their historical norm, and home affordability has been worsening in more than half of U.S. counties recently. (This is partly due to homes that are getting bigger, on average, and therefore costing and demanding more dollars per square foot.) Where you want to buy a home makes a big difference in how successfully you can do so. Here are the states that recently sported the lowest home values, per Zillow:
|
State |
Recent Median Home Value |
|---|---|
|
West Virginia |
$102,000 |
|
Mississippi |
$111,900 |
|
Oklahoma |
$114,200 |
|
Arkansas |
$115,700 |
|
Indiana |
$118,900 |
Source: Zillow.
And here are the states that recently sported the highest home values:
|
State |
Recent Median Home Value |
|---|---|
|
Colorado |
$321,000 |
|
Massachusetts |
$364,000 |
|
California |
$485,800 |
|
Washington |
$535,700 |
|
Hawaii |
$589,800 |
Source: Zillow.
The good news is that those are median prices, and many homes will cost far less than the median in any state. Of course, those homes will likely be less nice in one or more ways -- perhaps having less square footage, needing a lot of updating or repairs, or being in less desirable towns or neighborhoods. What can you do? Well, starting small or being willing to take on a fixer-upper can help you get into a home. You might also wait, as housing prices may well recede at some point. Or if you have geographic flexibility, consider relocating to a region with lower home values and a lower cost of living. You may find that your dollars go further and other goals, such as travel, may be more reachable.
At any given time, many people can't really afford to buy a home, for one or more reasons. That doesn't have to be a permanent condition, though. Taking some actions now may help you secure a nice roof over your head in the near future.
