Calculating the Salary Requirement Fallout from Mortgage Rate Increases

I wanted to follow up on our Monday piece with a bit more math (I’ll do it for you – I know you don’t want to bust out the TI-83 in a vacation week).

Today’s piece hinges on ‘mortgage qualification’, because of a few comments on Monday’s piece.  In a nutshell, mortgage qualification comes down to two ratios:

  • Front End Debt To Income” – The percentage of your income which will go towards the mortgage.  For conventional mortgages, this is usually capped around 28%, but underwriters obviously have wiggle room.  FHA comes in with a 31% base, and President Obama’s refinance proposals have historically targeted 31%.  We’ll use 28% here since we used 20% down last article.
  • Back End Debt to Income” – The percentage of all debt payments to income.  Conventional is usually capped at 36%, FHA 41%.  This number includes all your other payments – minimum payments on fat credit card debt, student loans, cars, other mortgages.

Too confusing?  I know a guy who made a calculator that helps you calculate home price affordability.  Give him some clicks.

Changes in Income Requirements Due to Mortgage Rate Spikes

Without further ado, here are the changes over the last 2 months (region below chart):

Median Price New Price 28% FEDTI Old Price 28% FEDTI Cost at 4.39% Cost at 3.40%
$208,700.00 $35,789.33 $31,732.98 $835.08 $740.44
$269,600.00 $46,232.89 $40,992.87 $1,078.77 $956.50
$159,800.00 $27,403.62 $24,297.70 $639.42 $566.95
$183,300.00 $31,433.57 $27,870.89 $733.45 $650.32
$276,400.00 $47,399.00 $42,026.82 $1,105.98 $980.63

(Top: All USA, Followed by Northeast, Midwest, South, and West).  Sources: Bankrate.com, Realtor.org for prices.)

So, the median house in the United States now requires a 12.7% raise for someone making $31,732.98 to afford the same house they could have afforded 2 months ago (Yes, $4,056.35 more income).

So, What’s On Tap?

Short week and vacation, you say?  I suppose it’s best to open this up to a discussion… how do you think the new income requirements will affect the housing market?  Do you expect there to be an increase in the number of people taking out various flavors of Adjustable Rate Mortgages?  Will refinances dry up?  Will the market plateau?  Will it (shudder) decline again?

Here’s your chance to play economist!  Let me know what you think in the comments.

Comments

  1. krantcents says

    Higher interest certainly means you can afford less! I think it will have a dampening effect on housing prices too. Just waiting may create some bargains or you can look for some bargains.

  2. says

    41% is too high to pretend like you can have a life on the other 59% AND save for the future, and be ready if one of you loses his job, etc. Just because the bank will lend it to your doesn’t mean you should go for it. The French law limits all debts to income to 33% and there are already thousands filing for bankruptcy as soon as things start to tank.

  3. says

    TI-83? No way! I’m staring at my trusty TI-89 from my sixteenth birthday. (Yes. I was the weird girl who requested that as a present.).

    Sadly I think people look at rates and payments when they’re too far into the process, so I think it’ll lead to more creative mortgages before it leads to dampening prices.

  4. The College Investor says

    I think the refis will slow down, as will the housing market recovery. Realize that the sequester furloughs are starting to kick in now as well, so disposable incomes will also fall. Higher requirements, lower incomes, no bueno.

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