Comment by htag | Hacker News Reader

Comment by htag | Hacker News Reader

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> 1) I would expect that the typical buyer isn't maxing out what they can afford just on a home. So all else being equal I would expect far less than 50% of homes to be unaffordable to a median buyer. Well maybe not "expect", but definitely hope.

Redfin defines affordable as

> We define an “affordable” listing as one where the monthly mortgage payment would be no more than 30% of the county’s median income. We estimated the monthly mortgage payment for each listing using the average 30-year-fixed mortgage rate during the month the home hit the market, according to Freddie Mac’s Primary Mortgage Market Survey. We assumed a 5% down payment, private mortgage insurance of 0.75% of the list price and homeowner’s insurance of $70 per month. We also factored in property tax data, assuming a tax rate of 1.25% of the list price if no record was available. We restricted our analysis to single-family homes, condos and townhomes with two bedrooms or more.

Many households are in a position to put more than 5% down or pay more than 30% of their household income in a mortgage. This is far from "maxing out"

Well, unless you’re already in the stratosphere of wealth where you you can take advantage of other financial instruments available to you like interest-only loans, jumbo mortgages, or stock/non-salary collateral (which by definition would put you outside the definition of a “typical household”), most banks will typically refuse to underwrite a mortgage that pushed up against the 36-42% debt-to-income ratio, which includes things like credit-card debt and other recurring payments, no matter how great your credit is. A 30% mortgage-to-income ratio, or even a 36% ratio if you have great credit, only leaves you around 6% for other debts before you hit that ceiling — which is another reason why something as standard as, say, student loans (especially the income-based payment ones) will lock out younger households from getting a mortgage, even if in their view they could still maybe make ends meet.

So even if a household “could” afford increased payments, good luck getting something as risk-averse as a bank to fund you.

Maybe if banks started offering 40 year (or even 99 year) mortgages, like they do in some EU countries, that would push the DTI threshold lower (though of course, you end up paying much more interest in the end)? But right now the US Government/Fannie Mae won’t underwrite loans which offer those terms, so here we are.

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