Millions of Renters Could Afford To Buy A Home Right Now, But Many Don’t Know It
A new analysis by Zillow reveals that millions of renter households across the United States could afford to buy a home right now, but many are unaware of their financial readiness. Despite the fact that 39% of American families were renters in 2022, Zillow found that nearly 7.9 million families were "income mortgage-ready," meaning they could afford a mortgage payment for the typical home in their area without exceeding 30% of their income. This surprising finding highlights a gap in understanding homeownership possibilities, leaving many renters potentially missing out on the opportunity to build equity and achieve the American Dream.
Key Takeaways:
- Millions of renters could be eligible for a mortgage but are unaware.
- Checking credit is a crucial step, and it won’t negatively impact your credit score.
- Understanding your debt-to-income ratio is essential for determining affordability.
- Consulting with a mortgage professional can provide valuable guidance and goalposts.
1. There’s "No Harm" in Checking Your Credit
One of the first steps to determining your homeownership potential lies in understanding your credit score. Brian Nevins, a sales manager at Bay Equity, emphasizes that potential homebuyers shouldn’t be hesitant to check their credit scores due to fear of negative impacts.
"That’s changed a lot in our industry where we do soft credit verifications upfront now, where it’s going to have no impact on somebody’s credit score," said Nevins. "There’s really no harm in checking."
Your credit score plays a critical role in securing a mortgage. It helps lenders determine whether to offer you a loan and, if so, at what interest rate. The higher your credit score, the lower the interest rate you’ll typically qualify for. This underscores the importance of building and maintaining a strong credit history.
However, for "credit invisible" individuals with limited credit experience, qualifying for a mortgage can be a challenge. Building credit responsibly is key, but keeping your debt-to-income ratio in check is equally important. Factors like student loan balances and credit card debt can significantly impact your ability to secure a mortgage.
2. Debt-To-Income Ratio: The Gateway to Affordability
Orphe Divounguy, senior economist at Zillow, identifies a high debt-to-income ratio (DTI) as the leading cause of mortgage denial. Lenders carefully analyze this ratio to gauge a borrower’s ability to handle a mortgage payment alongside existing debt obligations.
"Your debt-to-income ratio is simply the amount of monthly debt that you’re paying on your credit report," explained Nevins. "Think car payments, student loan payments, minimum payments on credit cards…any debt that you’re paying and the estimated monthly mortgage payment."
To assess your budget, it’s helpful to employ the 28/36 rule. This rule suggests that your housing expenses (including mortgage payments) should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36% of your income.
While the 28/36 rule serves as a baseline, lenders can sometimes be more flexible, especially with applicants who have a DTI up to 45%. However, most loan programs cap the maximum DTI at 50%. This means that if you earn $6,000 per month and have $500 in existing debt payments, your maximum affordable monthly mortgage payment would be $2,500 under the 50% DTI limit.
Beyond DTI, your affordability depends on several other factors, including:
- Median home sales price in your area
- Down payment amount
- Property taxes
- Homeowner’s insurance
- Homeowners association fees (if applicable)
3. Don’t Go It Alone: The Value of Mortgage Professionals
Navigating the complexities of homeownership requires a clear understanding of your financial situation and the factors influencing affordability. Melissa Cohn, regional vice president at William Raveis Mortgage, encourages renters nearing the end of their lease to explore their homeownership options.
"If rental prices are coming up, maybe it’s a good time to consider [buying instead]," she said.
Consulting with a mortgage professional can provide invaluable guidance and "goalposts" to help you determine your readiness. They can help you understand the necessary steps to secure a mortgage and provide insight into the overall process.
"They give people goalposts, like this is what you need to get in order to be able to purchase," Cohn added.
Remember, millions of renters have the potential to become homeowners. By taking the time to understand your credit score, debt-to-income ratio, and the factors influencing affordability, you can turn your renting days into homeownership bliss.