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By Tom Peterson
In most areas of the U.S., housing costs are rising faster than wages. To meet the federal government’s definition of housing affordability, costs should not exceed 30 percent of household income or 60 percent of the area’s median income. Looked at it this way, the issue of affordability becomes very personal. What may be affordable for some will not necessarily be affordable for all.
Financing a Home
Virtually all people purchasing homes are doing so with money borrowed from a bank or mortgage company. A mortgage is a legal agreement between buyer and lender that uses the house being purchased as collateral or security for the loan. Before lenders loan money for a house, they make sure that the buyer has enough monthly income to cover the costs of principal, interest, property taxes, and insurance (PITI). Most mortgage programs require that those payments not exceed 30 percent of the borrower’s monthly income. To keep the monthly payment affordable, a buyer might have to raise $25,000 or $30,000 for a down payment. For many first-time buyers, this kind of cash is out of reach.
Help Is Available
If you cannot find a home in your community that you can afford using traditional mortgage formulas, look into special programs to assist first-time homebuyers. A variety of programs have been spawned to help people get into home ownership. Some of the programs are federally sponsored, some are state-sponsored, and most rely on a mix of federal, state, and private funding subsidies to make them work.
Much of this assistance is tailored to people at or below the area median income (AMI). Some of the programs offer low-interest financing, down-payment assistance, or both. There are also programs designed to keep housing affordable by offering limited or shared equity clauses that restrict the future resale price of the home. Generally speaking, the more assistance one accepts, the more restrictions there will be on the terms of ownership or resale.
Buying a first home takes a lot of work. Begin by getting the lay of the land, your own and that of the community where you wish to live. Start a first-home file for basic information, your financial records, and employment information. Learn as much as you can about the housing market in your area — read real estate ads, talk with real estate agents, and study the real estate transactions section of your local newspaper. Learn the terms and numbers. Know what homes cost in your target area, what your monthly income is, what your monthly financial obligations are, and how much you think you can afford. Start to reduce your monthly debt and open a savings account that is dedicated to your first home. Even if you only save a few dollars a month, you will be moving in the right direction.
Locate Your Resources
Not everyone can buy a home, but there are programs and services like the Section 8 federal housing subsidy program that assist low- and very-low-income people with housing costs. Section 8 vouchers have traditionally been used for rental housing, but can now be used to purchase a home. This Section 8 program is usually run through local or state housing authorities. Every region of the country and most states have programs to help first-time homebuyers. State housing finance agencies or a NeighborWorks office ( see below ) are good resources. If you are a veteran of the military, contact the Veterans Administration for the latest information on homeownership assistance.
Community land trusts (CLTs) put together packages of funding to help offset the cost of housing for low- and moderate-income families and individuals. These organizations develop perpetually affordable housing by limiting the resale price of the home if and when the homeowners decide to sell. These limited- or shared-equity clauses keep the house affordable for the next eligible buyer and preserve the original homeownership subsidy for the life of the home.
Know the Limitations
Most home-buying assistance programs have income limitations and are often reserved for people earning 80 percent or less of the area median income. Most programs also require enough income to make the monthly mortgage payments. Program staff can help you verify and maintain your eligibility for homeownership subsidies until a match can be made.
It is important to understand under what circumstances you might be required to pay back the subsidy. Employer-assisted housing programs, for example, may have a residency or employment requirement — to get housing help you may need to stay in the home and work for the company. With CLTs, the selling price of the home will be limited should you decide to move. The price limitation may be a predetermined fixed price, but is usually determined by a formula. Have any restrictions and formulas explained to you and get them in writing before you commit.
Chances are NeighborWorks supports a housing agency or neighborhood program in your community. This nonprofit agency was established by Congress in 1978 to build partnerships that result in affordable housing and homeownership for low-income community members.
NeighborWorks’ goal is to revitalize communities through homeownership, housing rehabilitation, housing vouchers, equity protection, minority homeownership, ongoing education about homeownership and care, community economic development, and aging-in-place solutions. The NeighborWorks network has more than 240 community-based programs and operates in all 50 U.S. states to create stable, sustainable communities.
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