A surprising number of renters could afford to buy a home, according to a new Zillow Analysis.
Despite 39% of U.S. families renting in 2022, nearly 8 million qualified as “income mortgage-ready.” This means they could likely handle a mortgage payment for a typical home in their area without exceeding 30% of their income.
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While some people prefer renting, Zillow economist Orphe Divounguy suggests that many potential homeowners may simply be unaware of their financial ability to purchase a home.
“If your lease is about to end, it might be wise to determine whether you’re in a position to buy a house,” Melissa Cohn, regional vice president at William Raveis Mortgage, told CNBC.
To understand your homebuying potential, Cohn recommends starting with a lender’s verbal prequalification. This initial step can determine whether gathering the necessary paperwork is worthwhile.
Before that conversation, it’s crucial to clearly understand your financial picture. This includes knowing your annual income, debt levels, credit score, and debt-to-income ratio.
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According to Brian Nevins, a sales manager at Bay Equity, understanding your purchasing power is crucial to determining your homebuying readiness. Many potential homebuyers are unsure about their credit situation or hesitate to check it for fear of negative impacts. However, experts recommend monitoring your credit for several months before house hunting to identify any areas for improvement.
“That’s changed a lot in our industry, where we do soft credit verifications upfront now, and where it’s going to have no impact on somebody’s credit score,” Nevins said. “There’s really no harm in checking.”
Your credit score determines whether you qualify for a mortgage and the interest rate you’ll pay. A higher credit score typically means a lower interest rate.
Building credit is important, but so is managing your debt. A high debt-to-income ratio, influenced by factors like student loans or credit card balances, can hinder your mortgage approval chances.
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A high debt-to-income ratio is the primary reason mortgage applications are denied, according to Divounguy. Lenders use the ratio to assess whether you can handle an additional mortgage payment on top of your current debts.
To create a realistic homebuying budget, you must understand your debt-to-income ratio.
“Your debt-to-income ratio is simply the percentage of your monthly income dedicated to debt payments, including car loans, student loans, credit card minimums and your estimated mortgage payment,” Nevins said.
Your ability to afford a home depends on several factors beyond your credit and debt. Your area’s median home price, down payment, property taxes, homeowners insurance, and potential HOA fees all play a role. Consulting with a mortgage professional can provide valuable insights into fully understanding your financial picture and homebuying potential.
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This article Zillow Found That 8 Million Renters Would’ve Spent 30% Less Of their Total Income On Mortgage Payments If They Knew They Were ‘Mortgage-Ready’ originally appeared on Benzinga.com
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