I don't think it would be too wise for a couple making ten dollars per hour each to buy a $200,000 house. They'd be "House Poor".
I think this is how we got into this housing slump in the first place; people allowed to buy houses they couldn't afford.
And, those 5% interest rates are not that easy to get, unless you have perfect credit and no debt at all.
Who has that these days? ( Besides me, that is. Not bragging, just stating a fact.)
My husband and I could go buy twice the house we have now, but why would we want to? We have the house we need and want to have money for other things.
I wish budget counseling were offered to the people who apply to buy a house or car. But that would surely lose sales!
I must politely and very strongly disagree. 'House poor' can mean different things to different people, but I think most might define it as spending so much on your house payment, there isn't much discretionary income left over. I think that describes many people, whether they are renters, first time buyers, or those who have been paying a mortgage for years. Didn't you recently suggest that I tighten my belt. As I said then, belt-tightening is a good idea for everyone.
Thinking back, when my wife and I bought our home, we were house poor. We had sheets on windows, a patio set as our dining table, and no furniture at all in the living room. It was a struggle. I even lost my job a couple of weeks after buying the place. We'll celebrate our 10th anniversary here on June 15. I don't recommend being house poor, but many of us have gone through it and survived.
You are making erroneous assumptions, however, in your other statements. As someone who is in the industry and who works with lenders and buyers every day, I have a different perspective. Remember that each and every deal is different, but these generalities generally apply.
Lenders use what is known as DTI, or debt-to-income ratio in determining how much one can afford. Ideally, that number would be below 29%, but FHA and VA go as high as 41% and I've seen some people get approved at 45 or even 50% DTI. I wouldn't recommend going that high, but I know people who are doing just fine with relatively high debt to income.
Using the example of the couple making $10 each per hour, they'd gross $3466 per month. At 29%, they'd be at $1005 per month. At 41%, they'd qualify for a payment of $1421 per.
If they took out a loan for $200,000, at 5%, their P&I (principal and interest) payment would be $1074.
As for difficulty in getting it, you are incorrect in assuming that it is not that easy. In fact, rates were actually below 5% for both FHA and conventional loans today, hovering around 4.875%, but let's round up.
You don't have to have perfect credit or be debt-free to get good interest rates, but even if those were requirements, would you believe there a people out there, lots of them, who are in just that situation? I have clients who've actually been saving money and paying their bills on time, who are now ready to buy. I sold a house recently to a single mom who finally got her kids out on their own, and on her income of about $40K, was able to buy a very nice home for $186,000. Her credit wasn't perfect, but she did it, and she's never been happier.
Anyway, back to our couple: For a $200,000 home, figure on about $210 per month for taxes, and perhaps $50 to $60 per month on insurance (let's use $60). So, tax and insurance equals $270, add in the $1074 P&I payment, and their total monthly housing expense would be $1344, or a DTI of 38%.
Can they 'afford' it? According to the guidelines, yes. Will they be comfortable with that payment? That's up to them. Do they currently save their discretionary income or spend it?
Now, if they are buying a home at $200,000, they'll need a downpayment. If they are putting down 20% (yes, some do have that kind of money!), their payment drops to $1117 per month, a 32% DTI.
If not putting down 20%, they'll have mortgage insurance, which can add a couple hundred dollars a month to their payment, so they'd have to buy a home of say, $175,000 or less to still qualify and yes, there are homes, not many, but some selling for $175K or less, many more in Rancho, Orangevale, Cameron Park and other areas.
As for budget counseling, I know there are FHA approved counseling programs, but am not sure if they are required. I do recommend that anyone taking on a home purchase get both legal and tax advice before proceeding.
Now, I'm not a tax or legal expert (I have to make that disclaimer to avoid the appearance of giving tax advice), but to my understanding, there are tax benefits to home ownership, such as deductions for property taxes and for interest paid to lenders which reduce the home owner's tax burden, making home ownership even more beneficial.
Back to affordability, I went on Craigslist, which has taken over from newspaper classified ads as the number one source for rental information. I looked up 3 bedroom rental in Folsom. The CHEAPEST was $1445 per month.
http://sacramento.craigslist.org/search/apa?query=%22folsom+ca%22&srchType=A&minAsk=&maxAsk=&bedrooms=3
This is another factor in the surge of first-timers. They can now buy for about what it costs to rent, plus they own the place and get the tax breaks, too.
Home ownership is not for everyone, but it is a benefit to many, and homes are more affordable than ever right now.
I give people the same advice I give my own children.
