KOMO News is reporting that it takes an income of $105K to buy a median-priced home in the Seattle area. This is based off a report from HSH.com. When you dig deeper into the report, here’s how HSH.com came up with their numbers:
To compile these results, HSH.com calculates the annual before-tax income required to cover the mortgage’s principal, interest, property tax and homeowner’s insurance payment. We use standard 28 percent “front-end” debt ratios and a 20 percent down payment subtracted from the median-home-price data to arrive at our figures. Loans with less than a 20 percent down payment will incur mortgage insurance, which would in turn increase the required salary and require Private Mortgage Insurance. Results using smaller down payments and including PMI costs are provided on each market’s slide.
The front end ratio is the percentage of the total monthly mortgage payment (including principal, interest, mortgage insurance, property taxes, home owners insurance and HOA dues) of the borrower’s gross monthly income. Lenders are typically far more focused on the “back end” ratio vs the front end ratio.
The “back end” ratio factors the percentage the proposed total monthly mortgage payment plus the monthly debts of a borrower are of their gross monthly income. With Fannie Mae, if a lender is using automated underwriting, the back end ratio can be up to 50%. With an FHA loan, which has reduced down payment, the back end ratio can be even higher!
According to the National Association of Realtors, during the 4th quarter of 2018, homes in the greater Seattle area (King, Snohomish and Pierce Counties) had a median price of $489,600. This is the figure that the HSH.com article used to come up with the income needed of $105,367 to buy a home in the greater Seattle area.
Let’s see what income is needed if we’re not using 28% for a front end ratio, shall we? Based on using the same sales price, we’ll look at a couple of mortgage scenarios and how much income is needed to buy a home priced at $489,600. For the property taxes, I’m using 1.00% of the sales price (it seems to pencil out closer to what HSH must of used for taxes) and $65.00 per month estimated for home owners insurance. I’m also assuming $700 per month for debt (car loans, credit cards, student loans) payments.
Mortgage interest rates quoted are as of 2:00 p.m. on February 25, 2019, are based on a 740 or higher mid-credit score, subject to credit approval and may (will) change at any time. For your personal, current mortgage rate quote for your home located in Washington state, please click here.
Estimated income needed for 20% down payment: $75,840. This is based on:
- 30 year fixed conventional conforming mortgage.
- $489,600 sales price with a loan amount of $391,680. 20% down payment.
- Interest rate: 4.500% priced with 0.902 points. APR 4.646%. NOTE: Pricing may be slightly improved if using a program like HomeReady or Home Possible. Please contact me for more info.
- PITI (principal, interest, taxes and insurance) payment = $2,457.59
- Back end ratio = 49.9%. Income 75,840/12 months = $6,320. Total debts of $2457.59 + 700 = $3157.59. 3157.59/6320 = 49.9%. By the way, the front end ratio for this scenario is just under 39%.
Estimated income needed for 10% down payment: $83,688. This is based on:
- 30 year fixed conventional conforming mortgage.
- $489,600 sales price with a loan amount of $440,640. 10% down payment.
- Interest rate: 4.375% priced with 0.744 points. APR 4.664%. Rate and pmi priced using Fannie Mae HomeReady which is slightly improved.
- Total mortgage payment (PITI plus mortgage insurance): $2,786.88
- Back end ratio: 50%.
Estimated income needed for 3% down payment: $90,664. This is based on:
- 30 year fixed conventional conforming mortgage.
- $489,600 sales price with a loan amount of $474,912. 3% down payment.
- Interest rate: 4.375% priced with 0.869 points. APR 4.917%. Priced with Fannie Mae HomeReady.
- Total mortgage payment (PITI including mortgage insurance): $3,077.67.
- Back end ratio: 50%.
Obviously you DO NOT need an income of $105,000 to buy a $489,600 priced home in Seattle. In fact, that income would qualify for a much higher priced home. And, for the record, I’m not recommending that everyone use 50% of their gross monthly income to go towards their housing expenses.
With most of my clients, when their back end ratio is 50%, there are compensating circumstances, such as incomes that were averaged because of being commissioned or self employed or perhaps a spouse is not on the mortgage due to credit or employment, yet they have income to contribute towards the household. There may also be debt that’s scheduled to be paid off soon.
My main point for writing this post is that it always irks me a bit when I see headlines like the one going around making it seem like you need to have a six figure income to buy a “median-priced” home in the Puget Sound area…and that’s simply not true. I had to dig into the story to see what they’re basing their data on and use a more accurate, every day example.
If you’re thinking about buying (or refinancing) a home located anywhere in Washington state, where I’m licensed, I am happy to help you! Click here for a no-hassle mortgage rate quote for your personal scenario.
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