If You Had To Purchase Your Home Again Today, Could You Afford It?

One disconcerting phenomenon we’ve noticed recently is that many people, if they had to purchase their home again today, likely couldn’t afford it.

With changes to down payment rules and mortgage qualification, plus the recent increase in home prices, the “numbers” needed to qualify for a home purchase are higher than ever.

The fact is that many people, if they were to purchase again today, would be priced out of their own homes!

There are a few reasons for this, which we’ll explore below, but based on affordability today, many of us might not be able to afford the home we live in today if we had to purchase it again.

We will also share three examples below of people who purchased their home in the past but likely couldn’t afford the same home today if they had to purchase again.

Down Payment Rules

One big change for home buyers is that the rules for down payment have become more stringent than in the past.

A home that could have been purchased with a 5% down payment would now require between 5% and 20% down. These new rules have made it more challenging to purchase a home.

Homes under $500,000 require a minimum of 5% down payment. For example, a $500,000 home requires a down payment of just $25,000 or 5%.

Homes over $500,000 require a 5% down payment on the first $500,000 but then 10% down payment on any amount over $500,000. That means a $750,000 home requires a down payment of $50,000 or 6.67% at a minimum.

Homes over $1,000,000 however require even more, a minimum of 20%. While in the past a $1,000,000+ home could be purchased with a $50,000 down payment, it would now require $200,000 at a minimum.

These rules may have seemed less important when they first came out, but this has become more relevant lately as home prices continue to rise.

A home that used to be $500,000 five to ten years ago, which would only require a down payment of $25,000, may be worth $1,000,000+ now and require a down payment of $200,000+.

In this case, although the home value has doubled from $500,000 to $1,000,000, the required down payment has gone up by 8-times from $25,000 to $200,000!

The combination of down payment rules, coupled with rising home prices, means that saving up for a minimum down payment has become much harder.

Those who were able to purchase their home with only 5% to 20% down in the past may not be able to purchase their home again today due to the significantly higher down payment required.

Mortgage Qualification Rules

Similarly, tougher mortgage qualification rules have lowered the amount of mortgage debt a household can qualify for with the same level of income.

Mortgage qualification will differ slightly from one financial institution to another, but a good rule of thumb is that a maximum mortgage is between 3x to 4x gross household income.

A gross household income of $50,000 would qualify for a maximum mortgage of between $150,000 to $200,000.

A gross household income of $125,000 would qualify for a maximum mortgage of between $375,000 and $500,000.

A gross household income of $200,000 would qualify for a maximum mortgage of between $600,000 and $800,000.

Every situation is different, so we recommend speaking with an independent mortgage broker about your specific mortgage affordability. For example, one important thing to keep in mind is that the maximum mortgage will be reduced depending on the size of current debt payments and other monthly expenses. Monthly payments towards vehicle loans, lines of credit, credit cards, student loans etc. etc. can impact how much mortgage a household qualifies for.

Could You Purchase Your Home Today?

The result of these changes is that many people might not be able to purchase their current home again if they had to buy it today.

Here are three examples which many people might be able to relate to…

Example 1: $1.6M home and $193,000 household income

The family in this example bought their home 20-years ago when rules were different. Down payment rules were less stringent and mortgage qualification was much easier.

Their home is now worth $1,600,000 and as we can see below, they would be well short of the qualification criteria if they were to purchase their home again today (even with their higher income).

The down payment required for their current home is much higher than it was in the past, both in total dollars but also in percent. Their incomes, although increasing, are going up slower than their home value. The result is that they couldn’t even qualify for a mortgage on their current home if purchased today.

• Home value: $1,600,000
• Down payment required: Minimum $320,000 or 20%
• Mortgage qualification: Around $772,000
• Home purchase goal (if bought today): Short by $508,000!

Example 2: $400,000 home and $85,000 household income

The couple in this example bought their home just 3-years ago with 5% down. They are a dual income household with total income of $85,000 which is expected to increase. One sticking point is that the still have student loan payments and a vehicle loan payment, both which impact their ability to qualify for a mortgage.

Their starter home has jumped in value over the last 3-years. Their home is now worth $400,000 and they would just barely qualify for a mortgage depending on the lender and the size of their down payment.

• Home value: $400,000
• Down payment required: $20,000 or 5%
• Mortgage qualification: Around $340,000 maximum (but likely lower due to existing student loan payments and a vehicle loan payment)
• Home purchase goal (if bought today): Maybe possible with a “B” lender or a large down payment

Example 3: $1.1M home and $215,000 household income

The young family in this example bought their home when it was still under $1M. Now with the increase in home values their home is worth about $1.1M. They didn’t need a 20% down payment in the past but now based on the current rules they would need $220,000 up front to purchase the same home today.

At their income level their original home purchase was well within their means. At the time they bought their home they made a modest purchase given their family income.

Now however, they would be on the edge of qualification, even with their above average household income. They would be at the max of their budget and stretched when we consider other expenses like daycare costs.

• Home value: $1,100,000
• Down payment required: Minimum $220,000 or 20%
• Mortgage qualification: Around $860,000
• Home purchase goal (if bought today): Short by $20,000

If You Had To Purchase Your Home Again Today, Could You Afford It?

It’s not something we’d normally think about, and it can be a be disconcerting to realize, but if you had to purchase your home again today, could you afford it?

The answer will be different depending on where you live, but for many the answer could be “no”. Affordability of homes is at a point where many current homeowners have essentially been priced out of their own homes… if they had to buy again today at current values.

How would you fare if you had to purchase your home again today at its current value? Could you afford it? Would your budget be stretched?