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Household Income and Homebuying

I read an article from Gene Balk of the Seattle Times this past week discussing Sammamish’s household income number of $183,000 per year per the latest census data.  This made me consider a few things.

Whose income?
First of all to be clear, it’s household income.  So all income earned in by members of a household age 15+.  Thus, Sammamish places pretty high in part because there is a very high percentage of double-income households there.

But this begs the question:  how much income does a household need to buy a house?  Well, if we assume a 50% debt to income ratio (as allowed by Fannie Mae and Freddie Mac), 10% down, 4% interest rate, 1% property taxes, upfront mortgage insurance, $75 per month homeowners insurance, $500 in car loans/leases per month, $200 in student loans per month, and $150 in monthly minimum credit card payments – here’s what we get:

    1. Seattle median home price of $749,950 = minimum household income of $114,534.16
    2. Tacoma median home price of $419,000 = minimum household income of $73,787.92
    3. Renton median home price of $680,000 = minimum household income of $105,922.72
    4. Bellevue median home price of $1,743,000 = minimum household income of $236,801.04 *
    5. Bothell median home price of $700,000 = minimum household income of $108,385.28
    6. Everett median home price of $459,000 = minimum household income of $78,712.80

*For Bellevue’s median house price, 10% down options are not available through Fannie/Freddie.  Someone purchasing at this level MAY need to put more than 10% down, but that’s dependent on many variables.

Gross vs. Takehome Income

This is all good and dandy, and would technically work if I was putting together a preapproval given this scenario, but there are three main other items to consider:

    1. The 50% debt to income ratio that Fannie and Freddie let us originators use is based on gross income and not takehome income.  This is where that internet rule of thumb of 30% of gross income should go towards housing comes into play, because we have to make room for taxes, benefits, and 401k!
    2. There are many other monthly expenses that are not factored into debt to income ratios that homebuyers need to account for on the backend, such as utilities, cable, internet, cell phone, home maintenance, etc.
    3. And lastly here, just because we originators only factor in the minimum payment due on a credit card for calculating debt to income ratios, doesn’t mean you didn’t spend a lot more that month which ultimately needs to be paid back.  For example, a $150 monthly minimum payment might be based on a $2,500 outstanding credit card balance.  All of which needs to be paid back.

Conclusion

So, factoring in daily expenses like groceries, gas, parking, gym membership, events, dining basically, quality of life expenses brings us to a somewhat jarring conclusion for some homebuyers.  Just because a homebuyer CAN buy at a certain price-point, doesn’t mean that they SHOULD buy at that price point.  Thus, the $114,534.16 might technically be the minimum amount someone could earn to purchase the median-priced home in Seattle, but after factoring in quality of life expenses, and other non-factored expenses.  Let’s just say I always consult my clients to figure out what their comfortable monthly housing payment is first, and then work backward to figure out what purchase price that translates to.

 

 

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