"What Home Can I afford to Buy?" We help you answer that question!

​First-time home buyers are eager to answer one question: “What can I afford?”. The answer is more complicated than you might imagine. Several factors impact what a person can realistically afford, including debts, monthly expenses, credit, family size, and lifestyle. Depending on who does the math, it may seem you can “afford” a home that is actually above your means. However, at AHCOPA, we are unbiased advisors, not interested in a sale. Our housing counselors are solely invested in setting up our clients for success now and in the future!

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What is affordabilitY?

I’m an AmeriCorps VISTA member with a background in mortgage servicing and recently earned a housing counseling certificate from the Department of Housing and Urban Development (HUD). But even with my professional experience, when learning about the complexities of affordability, I was consistently surprised. Some terms used when discussing affordability can be confusing! 

For example, Area Median Income (AMI) is a commonly used metric for determining income eligibility. For some programs, a family making about 70% AMI is considered low-income. In contrast, other programs may classify that family as having moderate income. Another example is a family may meet the federal poverty threshold, but not be considered as facing housing poverty if their housing cost is less than a third of their income. ShelterForce has compiled a helpful list of definitions. 

Beyond definitions, another shocking reality is that affordability calculations are often based on Gross Income, not Net Income. This means that money you may not have readily available, like automatically withheld taxes and retirement contributions, is treated as “liquid”, or easily accessible monthly income. This sort of accounting will have a significant impact on your monthly budget. 

Housing and Urban Development (HUD), the federal department in charge of administering housing concerns, created guidelines for affordability known as housing and debt ratios. A housing ratio is calculated by dividing your monthly housing obligation (mortgage payment or rent) by your monthly Gross monthly income. A debt ratio is calculated by adding your monthly housing obligation and monthly debt obligations (credit card, car loans, student loans, etc) and dividing that total by your Gross monthly income. Whichever ratio has a lower total is the maximum you can afford. An AHCOPA housing counselor can help you determine these ratios. 

HUD sets the maximum housing ratio for renters at 30%. The maximum debt ratio for renters is 36%. For home buyers, the housing and debt ratios depend on the loan product. FHA, VA, USDA, and conventional loans each have their own set of ratios. This is where things can get tricky! Some banks are willing to lend to borrowers with a higher debt ratio than others, however, the higher you go the more challenging it will be to afford your monthly mortgage payments and the more you will have to cut back on other spending and even saving.
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Example

​Let’s look at an example of the “average” single adult in Philadelphia. The 2024 Area Median Income in Philadelphia is $80,300 a year or $6,692 a month. For an FHA loan, the housing ratio is set to a maximum of 31%, and the debt ratio is 43%. This means that the maximum mortgage responsibility a single adult earning the AMI and no debt can afford is $2,074 per month.

According to the PA Association of Realtors, the average debt ranges greatly from one generation to the next.        Across

generations, the average Pennsylvania resident owes about $20,655 in non-mortgage related debt, with average monthly payments for car loan obligation at $623 and credit cards at $254, a combined $877. So when considering debt, the “average” Philadelphian can afford a maximum of $2,877 of housing and debt obligation with an FHA loan product. If they had the average debt in Philadelphia, the maximum housing cost they could afford would be $2,000. 

​The $74 difference could mean this “average” home buyer with debt would need to earn enough down payment assistance to lower their monthly payments. They could also try to buy down their interest to stay within the affordability threshold. If this potential home buyer gets a second job to increase income and what they can afford, they may no longer be eligible for certain assistance programs. This $74 difference could also mean that a two-bedroom home is not within their budget and they may wish to purchase a one-bedroom home instead or put their home buying journey on hold to lower their debt ratio.

In truth, the “average” home buyer in this example does not exist and that’s why I used quotation marks on the word average. There are several lifestyle factors impacting what an individual or family can afford to purchase and maintain. Credit score, debt, employment history, family size, maternity leave, and medical needs are just some of the factors that influence how much home you can afford. 
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Why does Affordability matter?

Homeowners who are living beyond their affordability limits may face difficult budgeting decisions, such as missing utility payments or postponing or foregoing medical care. Lack of affordability can have a major impact on health and is correlated with higher levels of depression, stress, and chronic conditions such as diabetes and cardiovascular disease. 

HUD has identified that loss of income, including both unemployment and temporary disability, is the most common reason for foreclosure. Having adequate savings can protect those facing loss of income from delinquency and negative credit reporting while they search for new employment or obtain disability income. In times of crisis, such as unemployment, pandemic, or natural disaster, having 3 to 6 months of expenses saved acts as a safe net during emergencies. Most people living in unaffordable conditions are unable to meet that savings goal because there is no surplus in their budget.

At AHCOPA, we want our clients to succeed in purchasing a house, but also in keeping it. That’s why we may advise clients to purchase a house with lower monthly payments than the maximum the bank will approve. While it may be tempting to buy the most expensive house you can “afford”, it’s important that you factor in emergency savings and budgetary preferences like vacation, shopping, your children’s sports, and other things that bring you joy. It’s better to live comfortably than be stressed to make ends meet every month. Plus, as you start to earn equity in your home, you will eventually be able to upgrade to a better property in the future. Remember, the house you start with does not have to be the only home you ever buy.  
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TL;DR

The best way to determine what you can afford is to get free housing counseling. Housing counselors are a personalized free mortgage affordability calculator. In this blog, I explained how one solitary factor, debt, can impact a homeowner’s affordability, but most people have more complex situations than the “average” single Philadelphian homeowner. Things such as credit, down payment, retirement contributions, and household size will impact what you can afford. To start our First-Time Home Buyer Program and receive free counseling, the first step is to register for a workshop! 

First Time Home Buyer Workshop

Naara silva

Naara works with AHCOPA as an AmeriCorps VISTA through Housing Action Illinois