Conquering the Housing Crisis

Buying a home these days is impossible, right? You might as well try buying a rocket ship to Mars. The prices seem just as astronomical. But hope isn’t lost, and neither is your dream home. We won’t lie, it’ll take some time and effort. Still, there are professionals who want to help you. That’s what we’ll talk about today.

Millennials today are between the ages of 26 and 41. That’s prime home-buying age. Yet they themselves don’t think they can afford a home. For some, that’s probably true. Depending on how much they earn, where they live, and the home values there, they might be priced out.

But the truth is, millennials are buying homes. In fact, they’re buying a plurality of them. So what does it take? And more importantly, how much does it take? Let’s dive into that now. Even if you’re not a millennial, these three lessons apply. We’ll go over them quickly before diving deeper into how to do each one…

You’ll need a mortgage, and while that’s a topic unto itself, the first thing to know is this: Embrace the 31% Rule. It’s from the Federal Housing Administration, and it says you shouldn’t spend one penny over 31% of your gross monthly income on a mortgage. That makes sense, since you need the other 69% to live on.

Now that you know how much mortgage you can afford, time to add up everything else. There’s the down payment, which averaged 7% in 2021 but could be as low as 3% under certain circumstances. Closing costs are another chunk of change, ranging from 2 to 6%. And don’t forget the cost of moving into your new home, which can easily be four figures.

Based on those costs we just mentioned before, you’d need at least $43,000 cash to buy a home – possibly even more! So unless you have a lot of cash stashed away, you’re going to need to save up for a new home well before you start looking. It sounds like a lot to save, but it’s possible if you create a household budget. You know, keep a list of what you earn and what you spend. Sounds easy enough, but according to CNBC, 7 in 10 American adults don’t do that. You won’t be able to save for a home if you don’t know how much you’re spending right now.

Most people don’t budget because it’s boring and time-consuming. Except they’re wrong. Budgeting is so easy to do these days. There are scads of websites, apps, and programs that handle the drudgery of budgeting. Many of them cost nothing, and the ones that do cost only a few dollars. Mint, Personal Capital, You Need A Budget, an Mvelopes are some of the most popular programs out there. There are also a lot of banks and credit unions offer similar programs on their websites for their customers. Basically, you just type in your income and expenses and these programs do the math for you. You can even project your savings if you eat one less takeout dinner or if you refinance your mortgage. The software does all the heavy lifting!

Now let’s talk about a concept that will really help you buy a home, even if it sounds a little complicated at first. It’s called debt-to-income ratio, or DTI for short. It’s the most important number for buying a home – even more than your credit score. Like a low credit score, a high DTI can torpedo your chances for getting a mortgage. Here’s why…

Your lender calculates your debt-to-income ratio by dividing your monthly debt obligations by your pre-tax monthly income. So basically, it’s everything you owe each month – like credit cards and an auto loan – divided by everything you earn each month. To make a complicated formula a little easier, they usually leave out monthly expenses like food, utilities, and health insurance, among other things.

DTI is like a golf score. The lower the better. A low DTI means you’re not spending everything you earn just to make payments on debts. Mortgage lenders like that, because it means you have money available to make those steep monthly payments on your new home. For most people, the biggest loan we ever take out is a mortgage. You can understand why those lenders are a little cautious. That’s why they rely on your DTI to make their final decision.

The highest you your DTI could be and still have a chance of getting approved for a mortgage is 43 percent. Anything higher than that, and many lenders will flinch. They just won’t want to take a risk on you. Obviously, if you can get your DTI lower than that, it helps even more.

Remember we said you could get help doing all this stuff? Well, even here you can get free help. Just like there are budgeting apps, there are DTI calculators. Consolidated Credit has one that’s easy to use. Just go to our website and search for calculators. You’ll see one for DTI and many others that will help you save money for a home.

Obviously, homebuying is way more complicated than we just laid out – and that’s in the best of times. With inflation at record highs and interest rates soaring, it’s even harder today. So let’s talk about getting some help. We’ll start with the easy stuff and work our way up.

Not a lot of people know what HUD is. It’s short for the United States government’s Department of Housing and Urban Development, and it’s an amazing resource for homebuyers, especially those doing it for the first time. Unfortunately, as awesome as HUD is, it’s still the government, so it takes a little explaining before you can get the most out of their programs.

Even though HUD is a federal agency, it sponsors and trains counseling agencies in each state. Those agencies need to be certified, and they’re monitored, so you know you’re getting the best help possible. Just go to hud.gov slash counseling and you’ll be directed to an online search tool to find the agency nearest you.

One of those HUD-certified agencies you already know: Consolidated Credit! Consolidated Credit’s Housing Team is here to provide free support, whether you’re getting ready to buy a home or working to avoid eviction or foreclosure. You can also sign up for our first-time homebuyer events that cover essential topics like how to find a real estate agent or a walk-through of the complete home-buying process. To register or get more details, visit www.consolidatedcred.org slash housing.

While HUD offers many services, the one we want to focus on today is called the First-Time Homebuyer Program. Most of it is free, and the parts that cost a few bucks are reasonable and well worth it. Let’s quickly go over the key elements…

You can get a lot of great information for no cost. The structure of the program can vary slightly depending where you live, but here’s how we do it at Consolidated Credit: There’s a free orientation, a free virtual workshop, and then you get a free personal counseling session with a HUD-certified housing counselor.

While HUD counseling will expand on many of the things we outlined today, some of the most vital lessons you’ll learn have to do with assistance programs. Depending on your finances, you might be eligible for help with your mortgage or even your down payment. That’s especially valuable these days, with home prices and interest rates making it hard to afford a new home.

Of course, we suggest you start with Consolidated Credit, because we’ll offer you a free debt analysis from a certified credit counselor. That will go a long way to determining how close you are to getting into a new home. If our housing counselors can’t help you, we can refer you to someone who can. But you can also go to your bank and credit union and speak with a representative. Sure, they’ll want you to take out a mortgage with them, but very often, they’re helpful – because they know you can’t get that mortgage without all the other basics being covered.

So that’s the beginning, not the end, of the home-buying process. It seems daunting, doesn’t it? Well, it’s a lot easier when you have experts working with you. So that’s our biggest takeaway today: Don’t go it alone. Spend time investigating qualified professionals, they can help you get into that dream home, even in an economy that’s something of a nightmare.

Thank you.