Sunday, March 22, 2009

We Can Afford How Much on Minimum Wage?

First-time homebuyers may be surprised at how much they can afford, especially in today’s market!

METROPOLITAN DETROIT, MI – The biggest economic meltdown since the Great Depression and the resulting foreclosures have had a profound affect on the housing market.

Housing values across the county have dropped over 25% from their peaks. In some parts of the country, double-digit unemployment has pushed values down even further.

All this is creating an incredible buying opportunity for homebuyers, especially first-time homebuyers who don’t have to worry about dealing with an existing home.

Just how much can a first-time buyer afford to buy?

Well let’s take a look at a couple earning minimum wage.

Minimum wage is currently $6.55/hour and slated to go to $7.25/hour this July. Let’s use the $6.55 amount. An individual working full-time would then have gross earnings of $13, 100 based on a 40 hour work week for 50 weeks a year (assuming 2 week unpaid vacation). A couple would have earnings of twice that equaling $26,200 annually or $2,183 per month.

One of the best first-time buyer programs currently available is the department of Housing & Urban Development’s (HUD) FHA program (Federal Housing Administration). FHA requires a down payment of only 3.5% and allows a seller to pay up to 6% of the purchase price towards everything else EXCEPT the down payment for the buyer.

To qualify for a mortgage, FHA allows 31% of borrower’s gross monthly income to be used for a housing payment - including the mortgage, property taxes, home insurance and condo association fees. In our example, 31% of $2,183 in monthly gross income equals $677 for a monthly housing payment.

CAUTION – qualifying for a mortgage also takes into account other debts payments like car payments, credit cards and student loans. For FHA the total amount of debt payments, including housing, cannot exceed 43% of monthly gross income. In our example this 43% would equal $939/month. If our example couple already had monthly debts of $350/month, then subtracting this from the maximum allowed of $939 would only leave $589 for a monthly housing payment.

So what can a buyer purchase with a $677 monthly payment? This is where it gets complicated.

Property taxes can vary from house to house and interest rates change daily. The higher both these go, the lower the corresponding purchase price.

For our example we’ll have to make some assumptions. Let’s assume property taxes of $2100 and home insurance of $840, both annually. For an interest rate, we’ll assume 5.5% (this is not a quote, but federal law requires us to include the APR of 6.227%). Given these parameters, a $677 monthly payment would equate to an approximate purchase price of $72,000.

What can a homebuyer get for $72,000? Let’s keep in mind that if we take into account the recent 25% drop in housing values, that homebuyers are looking at houses that were valued at almost $100,000 just a couple of years ago.

How many homes will buyers have to choose from in this price range? A search of listings on RealComp performed March 22, 2009 shows the following statistics:

These numbers show there are numerous homes available for first-time homebuyers in several areas.

Now, many of them are foreclosures and may need work to get them in livable condition, but FHA also offers a renovation program called the 203(k) that allows repairs to be financed and included in the loan amount.

Again, our example makes some assumptions that homebuyers need to be careful about. Please check with a competent mortgage originator before signing a purchase contract.

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