A recent study identified Indianapolis (along with a few other Midwestern cities) as one of the most affordable housing markets in the country, allowing those with an income of just $20,294 to afford an average-priced house without busting their monthly budget. And with foreclosure rates continuing to drop, hitting nationwide lows since the Great Recession, home ownership can look like an attractive option. But is it really possible -- or a good idea -- to purchase a home on less than half the median U.S. income? Here is more about the results of this study and the factors you'll want to consider when buying a home on a relatively low income.
How is an average home affordable on only $20,000 in salary?
In some metro areas like Indianapolis, the average home price is very low relative to income -- while an entry level home in San Francisco or Manhattan can set you back half a million or more, these homes in the Indianapolis area are closer to $133,000 in price. And with mortgage rates at record lows, spreading the price of a home over the course of 15 to 30 years can lead to a monthly mortgage cost of just around $600. Because mortgage lenders like a house payment to stay at or below 34 percent of gross income, the minimum income an individual could have to qualify for an average house (assuming a 20 percent down payment) is just $20,000.
What factors should you consider when purchasing a home on a low salary?
Although careful budgeting can make a home affordable on a salary below the national median in many areas, you'll want to evaluate a variety of factors to determine whether it makes financial sense for you.
The first factor is your down payment. There are certain government programs -- like FHA, USDA, and even the VA -- that can allow you to qualify for a mortgage with a lower-than-normal down payment, but in most cases, you'll need at least 20 percent to qualify for a conventional mortgage at a competitive interest rate. It can be tough to save this much while paying rent and other expenses, so you may want to move in with parents to save up funds or take other steps to set aside money before applying for a mortgage.
You'll also want to consider the cost of updating or maintaining your home. When you're purchasing on the lower end of the market, you can find that the homes in your price range need some work -- so stretching just to afford the mortgage can put you in an untenable situation. Unless you expect your income to increase significantly in the future or you have the knowledge and connections to do your own home maintenance and repair at little to no cost, you may want to avoid buying at the top of your income limit.