Think You Can’t Afford Today’s Housing Market?

Between rising mortgage rates and an overheated real estate market, aspiring homeowners may feel priced out.

Across the United States, the supply of listed and available homes for sale is not sufficient for meeting the record-high demand of aspiring homebuyers.

What’s more, volatile prices for lumber and other building materials, delivery delays, and shortages of skilled labor in the construction industry have impacted homebuilders. These global supply chain issues amid the Covid-19 pandemic have contributed to the low inventory of housing.

With fewer new homes being built, it’s more competitive to buy a home. First-time homebuyers have to compete with all homebuyers, including investment companies that can make all-cash, no-contingency offers. These firms are buying single-family homes at scale and turning them into rental properties. These factors may fuel real estate bidding wars among homebuyers.

Housing affordability is also impacted by rising interest rates as the Federal Reserve tries to vanquish the highest inflation in 40 years.

Will I Ever Be Able to Afford a House?

If you think you can’t afford a house in today’s market, all hope may not be lost. How can anyone afford a house under these conditions? Here are some options you may consider in your quest for homeownership:

1. Consider Shorter Mortgage Terms

You can look into a shorter-than-30-year home loan when choosing mortgage terms, which can mean a lower interest rate. For example, the average rate on a 30-year fixed-rate mortgage stood at 5.27% in the first week of May 2022 compared with 4.52% for a 15-year fixed-rate mortgage, according to Freddie Mac data.

2. Downsize the Dream Home

If your dream home seems out of reach, you can explore more affordable neighborhoods or look for smaller homes on the market. By downsizing your home ambitions, the smaller amount you need to borrow may mean monthly mortgage payments that are more in line with your budget.

3. Write an Offer Letter

If you’re ready to make a bid for a home, consider writing a real estate offer letter with a personal touch. The letter could explain who you are and highlight why you love the property and neighborhood. Some sellers may prefer the highest bidder, but other sellers may prefer the bidder they think will most contribute to the community — or take good care of their garden.

4. Consider a Larger Down Payment

Making a traditional 20% down payment on a house or larger might be an option for some entry-level homebuyers. Bigger down payments can translate to lower monthly payments on a mortgage.

This online mortgage calculator shows how home loan seekers can lower their monthly mortgage payments and total interest charges by making a larger down payment on a home.

5. Consider the Minimal Down Payment

If you don’t have the down payment because prices are being bid up, look for lenders who accept less than 20% down. For example, SoFi offers mortgage loans with as little as 3% down to qualifying first-time homebuyers.

6. Improve Your Debt-to-Income Ratio

Your debt-to-income ratio or DTI measures your ability to afford new debt without defaulting on your existing obligations. Most lenders like to see a DTI below 36%, and refinancing your existing debts can help improve your DTI in some cases.

For example, refinancing an auto loan for a lower monthly payment would improve your DTI if your gross monthly income remains equal. Lowering your DTI may help you qualify for a bigger mortgage. This is one of the reasons why your debt to income ratio matters.

7. Explore Financial Assistance Programs

Government and nonprofit programs may offer down payment assistance to first-time homebuyers. If you’re looking to buy a house for the first time, you may explore financial assistance programs that may help you afford a larger down payment.

8. Be Prepared for Counter Offers

If you’re ready to bid on a home, understand that sellers may push back with a real estate counter offer. Sellers may present counter offers if they’re dissatisfied with a buyer’s initial bid. The homebuying process can have many twists and turns, so you may want to be ready and prepared for possible counter offers.

The Takeaway

An overheated housing market does not necessarily mean game over for entry-level homebuyers. Anyone with homeownership ambitions may have more pathways for success than they realize. For example, writing an offer letter and navigating your down payment options can help you compete even in a seller’s market.

If you think you are priced out of the housing market, SoFi may be able to help. SoFi offers home mortgages with competitive rates and flexible term options. Qualifying first-time homebuyers can put just 3% down.

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Photo credit: iStock/Edwin Tan
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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