Author Archives: freeandclear

Trended Credit Data Impacts Mortgage Qualification Process

Fannie Mae recently incorporated the use of trended credit data as another input in the mortgage qualification process. In short, Fannie Mae is a government-sponsored enterprise (GSE) that develops mortgage programs and underwriting policies.  Fannie Mae also provides capital to lenders by buying mortgages from them.  Although the policies and practices used by Fannie Mae do not apply to all borrowers, lenders or loans, they have meaningful impact on borrower qualification guidelines across the mortgage industry.  Because of Fannie Mae’s status within the industry, the use of trended credit data is a development all mortgage industry participants should monitor and understand.

 

What is Trended Credit Data?

A traditional credit report contains information on a borrower’s current debt account balances, credit usage and availability and on-time payment history.  By comparison, trended credit report data contains monthly information on how a borrower has managed their credit and paid their bills over the prior twenty-four months.  For example, trended credit data shows if borrowers have made the minimum payment, paid more than the minimum payment or consistently paid off their credit card balances on a monthly basis over the prior two years.  

 

How Is Trended Credit Data Used?

Trended credit data provides lenders with additional and more granular information that they can use as an additional input to determine if an applicant qualifies for a mortgage.  For example, research shows that borrowers who consistently pay more than the minimum required monthly payment or who regularly pay-off their credit card bills are significantly less likely to default on their home loan.  With these borrowers, trended credit data provides more relevant information to inform the lender decision-making process than a standard credit report which only offers a snapshot of a borrower’s credit profile at a given point in time and may not give the borrower proper credit for effectively managing their finances.  

 

What About Your Credit Score?

It is important to highlight that trended credit data does not replace a borrower’s credit score and your credit score remains an integral factor in determining the mortgage rate you pay on your loan.  Trended credit data that demonstrates an applicant’s ability to consistently repay debt over time, however, may enable more applicants with lower credit scores to qualify for a mortgage.  The use of trended credit data in the mortgage process should also motivate borrowers to consistently make more than the minimum payment on their credit card accounts, which has the added benefit of saving them money on interest expense.

 

What Borrowers Should Do

Because trended credit report data was implemented relatively recently, applicants should ask lenders if it will be used in the mortgage qualification process and understand if using trended credit data helps or hurts their ability to qualify for a mortgage.

 

It will also be interesting to see if trended credit data is adopted as a borrower qualification factor more widely across the mortgage industry.  In the meantime, borrowers should continue to proactively manage their credit profile by making sound financial decisions such as paying down their credit card bills and other recurring debt over time.

 

FREEandCLEAR provides a comprehensive overview of your credit score and the mortgage process, including the use of trended credit data, that borrowers should review before applying for a home loan.

USDA Lowers Mortgage Insurance Fees for USDA Home Loan Program

As of October 1, 2016, the USDA lowered the upfront and ongoing mortgage insurance fees for the USDA Guaranteed Home Loan Program.  The USDA Home Loan Program enables eligible borrowers to buy homes located in federally-designated rural areas with no down payment.  The program is designed to help individuals with low-to-moderate incomes afford to buy homes in rural communities.  USDA guaranteed home loans are available through approved lenders such as banks, mortgage  brokers, mortgage banks and credit unions but the loans are backed, or insured, by the USDA.

 

The USDA charges borrowers upfront and ongoing monthly fees to provide insurance that protects lenders in the event that borrowers default on their mortgage and cannot repay their loan.  These fees are similar to upfront and ongoing FHA mortgage insurance premium (MIP) for an FHA home loan or the monthly private mortgage insurance (PMI) fee for a conventional loan.  The upfront USDA mortgage insurance fee is also called a guarantee fee and the ongoing mortgage insurance fee is known as an annual fee (even though borrowers pay the fee monthly along with their mortgage payment).

 

On October 1st, the USDA reduced the upfront mortgage insurance fee from 2.0% of the loan amount to 1.0% of the loan amount and reduced the ongoing annual insurance fee from 0.5% of the loan amount to 0.35% of the loan amount.  The reduction in the upfront and ongoing USDA mortgage insurance fees reduces closing costs and total monthly housing expense for borrowers.

 

For example, based on the lower fees, for a $200,000 loan the upfront guarantee fee is reduced from approximately $4,080 to $2,020 and the ongoing monthly fee is reduced from $85.00 to $59.00. The example below demonstrates how the fees are calculated.

 

Up-front USDA mortgage insurance or guarantee fee

    • First, we calculate the total mortgage amount including the the upfront USDA mortgage insurance fee:
    • $200,000 (mortgage amount before USDA mortgage insurance) + $2,000 (upfront USDA mortgage insurance) = $202,000 total mortgage amount
    • $202,000 (total mortgage amount) * 1.0% (upfront USDA mortgage insurance fee) = $2,020 (up-front USDA mortgage insurance fee)

 

Ongoing monthly USDA mortgage insurance fee

    • $202,000 (total mortgage amount) * .35% (ongoing annual USDA mortgage insurance fee) = $707 (ongoing annual USDA mortgage insurance fee) / 12 months = $59.00 monthly USDA mortgage insurance fee

 

Reducing mortgage insurance fees for the USDA home loan program should make home ownership more attainable for more borrowers, especially for people who can afford to make a monthly mortgage payment but who may struggle to save money for closing costs.
FREandCLEAR provides a comprehensive overview of the USDA Home Loan Program including borrower qualification requirements and property eligibility guidelines.  We also encourage you to use our USDA Home Loan Calculator to determine what size USDA loan you can afford as well as the upfront and monthly USDA mortgage insurance costs based on the new, lower guarantee and annual fee rates.

Your Path Mortgage Program Expands Home Ownership Opportunity

We want to highlight a new Freddie Mac mortgage program designed to extend home ownership to more borrowers. Freddie Mac, in collaboration with Alterra Home Loans and New American Funding, launched the Your Path Mortgage Program to address the growth in multi-generational households and increase in borrowers with non-traditional income sources.

 

Similar to other low down payment programs, Your Path only requires a 3.0% down payment but offers more flexible mortgage qualification requirements that should expand the pool of potential home owners. Innovative features of the program include:

 

  • Include income from non-borrower household members
  • Include income from a second job with only a year of work history
  • More options for self-employed borrowers to demonstrate income
  • Flexibility to include income from seasonal employment
  • Reduced documentation required to show source of down payment

 

We provide a comprehensive overview of the Your Path Mortgage Program on FREEandCLEAR including key program information and borrower eligibility requirements.

 

We also added the program to our informative comparison of low and no down payment mortgage programs. Our comparison chart continues to be a highly valuable tool for borrowers and housing advocates to compare, contrast and select a low or no down payment mortgage program.

 

Comparison of low down payment mortgage programs

Comparison of low down payment mortgage programs

 

Although the Your Path Program was announced as a twelve month pilot program, it represents another potentially attractive mortgage option for low-to-moderate income home buyers along with competing programs such as the HomeReady and FHA Mortgage programs.

 

Please review our resources and share your feedback as we are always seeking input on how to improve FREEandCLEAR.

How Much Home the Rent Buys in the 40 Most Expensive U.S. Cities

In March, FREEandCLEAR released our first analysis of how much home you could buy based on the median rent in the 20 most expensive U.S. cities.  The analysis sparked a lot of interest and touched upon important issues such as sky rocketing rents and housing affordability.  Due to positive feedback and constructive input we have updated the analysis to reflect current interest rates and rents and expanded the analysis from 20 cities to 40 to cover more of the country.  Our objective for the analysis is to promote borrower awareness and education while at the same time shining a spotlight on just how expensive it is to rent or buy a home in major cities across the country.

As a refresher, our analysis uses the median rent by city according to apartment listing website Zumper and determines the mortgage equivalent based on the median rent.  In short, the mortgage equivalent is what size mortgage you could afford if your monthly mortgage payment was the same as your monthly rent payment.  For example, instead of paying $3,590 a month for rent in San Francisco (for a one bedroom apartment!!!), what size mortgage could you afford based on a $3,590 mortgage payment?  We use our Rent Payment Mortgage Affordability Calculator to determine the mortgage equivalent for all 40 cities based on current interest rates.

As we highlighted in our first analysis, it is important for borrowers to recognize that your mortgage payment is only one component of total monthly housing expense, which also includes property taxes, homeowners insurance and other applicable housing-related costs. The mortgage tax benefit, however, provides a financial cushion that can offset part or all of these costs.

The table below shows the mortgage equivalent for the cities based median rent, with San Francisco topping the chart at approximately $800,000  and El Paso coming in at number 40 with a mortgage equivalent of approximately $147,000 (based on $660 in rent).  The chart demonstrates the large mortgage amounts renters in many cities could afford and illustrates the wide gap between the most expensive and less expensive cities in stark fashion.

City Median Rent
One Bedroom		 Mortgage
Equivalent
1 San Francisco $3,590 $799,475
2 New York $3,250 $723,759
3 San Jose $2,290 $509,972
4 Boston $2,280 $507,745
4 Oakland $2,270 $505,518
6 Washington $2,270 $505,518
7 Los Angeles $1,970 $438,709
8 Miami $1,850 $411,986
9 Seattle $1,790 $398,624
10 Chicago $1,740 $387,489
11 San Diego $1,500 $334,042
12 Portland $1,310 $291,730
13 Philadelphia $1,280 $285,050
14 Atlanta $1,270 $282,823
15 Minneapolis $1,260 $280,596
16 Denver $1,220 $271,688
17 Baltimore $1,200 $267,234
18 Long Beach $1,200 $267,234
19 Dallas $1,190 $265,007
20 Austin $1,130 $251,645
21 Houston $990 $220,468
22 Nashville $990 $220,468
23 Sacramento $990 $220,468
24 Charlotte $970 $216,014
25 Raleigh $910 $202,652
26 Virginia Beach $900 $200,425
27 San Antonio $890 $198,199
28 Fort Worth $850 $189,291
29 Milwaukee $840 $187,064
30 Jacksonville $830 $184,837
31 Phoenix $830 $184,837
32 Fresno $800 $178,156
33 Las Vegas $780 $173,702
34 Mesa $760 $169,248
35 Colorado Springs $750 $167,021
36 Omaha $750 $167,021
37 Kansas City $740 $164,794
38 Arlington $730 $162,567
39 Louisville $720 $160,340
40 El Paso $660 $146,979
Source: Zumper (Median Rent). Based on interest rate of 3.500%

Just because you can afford a monthly mortgage payment does not mean you can qualify for a mortgage.  Multiple factors including your credit score, financial profile, lender qualification requirements, down payment and other inputs determine your ability to qualify for a mortgage. And most people who go from renting to having a mortgage can tell you it is usually significantly harder to qualify for a mortgage than a lease.  Mortgage lenders also use debt-to-income ratios to determine what size mortgage borrowers can afford, which causes many prospective home buyers to focus on how much money they need to make to qualify for a mortgage.

The table below shows the annual gross income required to qualify for the mortgage equivalent in each city.  For example, to qualify for an approximately $725,000 mortgage in New York requires approximately $130,000 in annual gross income as compared to approximately $28,500 in gross income for an approximately $160,000 mortgage in Louisville.  Because lenders look at an applicant’s debt in addition to their income we assumed a level of borrower debt as a percentage of income for the analysis.

The analysis shows that in 36 of the 40 cities, or 90% of cities, the median gross income is higher than the required income to qualify for a mortgage which implies that more renters should consider buying homes.  For the four cities where the median gross income is lower than the required income to qualify for a mortgage, the sizeable gaps (New York (~$48,000), San Francisco (~$35,000), Miami (~$16,000) and Los Angeles (~$10,000)) imply that the percentage of renters who actually make enough money to qualify for a mortgage to buy a home is much lower than in the other cities.

City Mortgage
Equivalent		 Required Annual
Gross Income		 City Median
Gross Income
1 San Francisco $799,475 $142,404 $107,700
2 New York $723,759 $128,928 $80,700
3 San Jose $509,972 $90,828 $107,700
4 Boston $507,745 $90,432 $98,100
4 Oakland $505,518 $90,036 $95,800
6 Washington $505,518 $90,036 $109,200
7 Los Angeles $438,709 $78,132 $67,900
8 Miami $411,986 $73,404 $57,500
9 Seattle $398,624 $71,004 $90,300
10 Chicago $387,489 $69,036 $76,900
11 San Diego $334,042 $59,496 $73,500
12 Portland $291,730 $51,972 $73,900
13 Philadelphia $285,050 $50,772 $81,100
14 Atlanta $282,823 $50,364 $68,300
15 Minneapolis $280,596 $49,968 $86,600
16 Denver $271,688 $48,396 $80,100
17 Baltimore $267,234 $47,604 $89,600
18 Long Beach $267,234 $47,604 $67,900
19 Dallas $265,007 $47,196 $71,700
20 Austin $251,645 $44,832 $77,800
21 Houston $220,468 $39,264 $69,300
22 Nashville $220,468 $39,264 $68,500
23 Sacramento $220,468 $39,264 $71,500
24 Charlotte $216,014 $38,472 $67,200
25 Raleigh $202,652 $36,096 $78,800
26 Virginia Beach $200,425 $35,700 $70,900
27 San Antonio $198,199 $35,304 $63,400
28 Fort Worth $189,291 $33,732 $70,400
29 Milwaukee $187,064 $33,336 $73,300
30 Jacksonville $184,837 $32,928 $64,900
31 Phoenix $184,837 $32,928 $64,000
32 Fresno $178,156 $31,728 $49,500
33 Las Vegas $173,702 $30,936 $59,800
34 Mesa $169,248 $30,132 $64,000
35 Colorado Springs $167,021 $29,772 $73,000
36 Omaha $167,021 $29,772 $72,800
37 Kansas City $164,794 $29,364 $73,300
38 Arlington $162,567 $28,968 $70,400
39 Louisville $160,340 $28,572 $67,000
40 El Paso $146,979 $26,172 $47,600
U.S. Median Annual Gross Income $65,700
Source: Required income assumes borrower debt and standard debt-to-income ratio.  Median income data uses the greater of HUD or FHFA median family income.

The chart below takes the analysis one step further and shows how the mortgage equivalent translates into home price for each city. So basically what price home you can afford based on the median rent, assuming you make a 20% down payment.  For example, based on the median rent in Los Angeles, the mortgage equivalent is approximately $440,000, and assuming you make a 20% down payment you could buy an approximately $550,000 home

It is important to highlight two points about the home price equivalent.  First, it is certainly possible to buy a home with a down payment of less than 20% and we are strong advocates of low or no down payment mortgage programs that make home ownership more attainable.  Second, saving sufficient funds for a down payment (for example, ~$200,000 in San Francisco) is one of the biggest obstacles to buying a home so this is where the leap from renting to buying breaks down for many borrowers, especially in more expensive markets where higher rents make it harder to save for a down payment.

Despite the practical limitations for borrowers, the analysis reflects several interesting housing market trends.  In 30 of the 40 cities, home price based on rent is higher than median home price which suggests that more renters could afford to buy homes in those cities.  Cities with a home price based on rent lower than the median home price may have less affordable housing inventory for renters who want to buy.   The analysis also shows the widening disparity in property values and affordability across different markets with the highest priced market, San Francisco with home price equivalent of $999,344, being more than five times more expensive than the number 40 market, El Paso with a home price equivalent of $183,724.

City Mortgage
Equivalent		 Home Price
Equivalent		 City Median
Home Price
1 San Francisco $799,475 $999,344 $770,300
2 New York $723,759 $904,699 $467,900
3 San Jose $509,972 $637,465 $970,000
4 Boston $507,745 $634,681 $378,500
4 Oakland $505,518 $631,898 $770,300
6 Washington $505,518 $631,898 $370,400
7 Los Angeles $438,709 $548,386 $458,900
8 Miami $411,986 $514,983 $286,700
9 Seattle $398,624 $498,280 $383,100
10 Chicago $387,489 $484,361 $208,600
11 San Diego $334,042 $417,553 $554,300
12 Portland $291,730 $364,663 $326,700
13 Philadelphia $285,050 $356,313 $203,900
14 Atlanta $282,823 $353,529 $167,800
15 Minneapolis $280,596 $350,745 $222,800
16 Denver $271,688 $339,610 $369,000
17 Baltimore $267,234 $334,043 $229,200
18 Long Beach $267,234 $334,043 $458,900
19 Dallas $265,007 $331,259 $210,100
20 Austin $251,645 $314,556 $269,700
21 Houston $220,468 $275,585 $208,000
22 Nashville $220,468 $275,585 $204,700
23 Sacramento $220,468 $275,585 $297,600
24 Charlotte $216,014 $270,018 $190,300
25 Raleigh $202,652 $253,315 $233,400
26 Virginia Beach $200,425 $250,531 $198,000
27 San Antonio $198,199 $247,749 $195,500
28 Fort Worth $189,291 $236,614 $210,100
29 Milwaukee $187,064 $233,830 $208,000
30 Jacksonville $184,837 $231,046 $195,000
31 Phoenix $184,837 $231,046 $223,100
32 Fresno $178,156 $222,695 $215,000
33 Las Vegas $173,702 $217,128 $222,500
34 Mesa $169,248 $211,560 $223,100
35 Colorado Springs $167,021 $208,776 $239,800
36 Omaha $167,021 $208,776 $157,700
37 Kansas City $164,794 $205,993 $163,300
38 Arlington $162,567 $203,209 $370,400
39 Louisville $160,340 $200,425 $148,100
40 El Paso $146,979 $183,724 $137,500
U.S. Median Existing Home Price $232,500
U.S. Median New Home Price $321,100
Source: Home price equivalent assumes 20% down payment.  City and U.S. median existing home price data from National Association of Realtors. Median new home price from U.S. Census.

The analysis up to this point has been based on the median rent for a one bedroom apartment in each city but how much mortgage and home could you afford based on the rent for a two bedroom apartment?

The table below shows the mortgage equivalent, home price equivalent and the annual gross income required to qualify for a mortgage based the median rent for a two bedroom apartment.  Once again, San Francisco tops the list with an eye-popping home price equivalent of $1.335 million (as compared to ~$1.275 million in March) based on $4,800 in monthly rent.  The significant home price equivalents for many cities in the table below reinforces the one bedroom rent analysis and underscores that more renters could consider buying homes.

City Median Rent
Two Bedroom		 Mortgage
Equivalent		 Home Price Equivalent Required Annual Gross Income
1 San Francisco $4,800 $1,068,936 $1,336,170 $190,404
2 New York $3,690 $821,744 $1,027,180 $146,364
3 Washington $3,150 $701,489 $876,861 $124,968
4 San Jose $2,910 $648,042 $810,053 $115,428
5 Los Angeles $2,900 $645,815 $807,269 $115,032
6 Oakland $2,750 $612,411 $765,514 $109,104
7 Boston $2,620 $583,461 $729,326 $103,932
8 Miami $2,550 $567,872 $709,840 $101,172
9 Chicago $2,430 $541,149 $676,436 $96,396
10 Seattle $2,370 $527,787 $659,734 $93,996
11 San Diego $2,100 $467,659 $584,574 $83,304
12 Denver $1,730 $385,262 $481,578 $68,628
13 Long Beach $1,700 $378,581 $473,226 $67,428
14 Portland $1,630 $362,993 $453,741 $64,668
15 Dallas $1,620 $360,766 $450,958 $64,272
16 Atlanta $1,600 $356,312 $445,390 $63,468
17 Austin $1,490 $331,816 $414,770 $59,100
18 Minneapolis $1,460 $325,135 $406,419 $57,900
19 Philadelphia $1,440 $320,681 $400,851 $57,132
20 Baltimore $1,410 $314,000 $392,500 $55,932
21 Houston $1,230 $273,915 $342,394 $48,804
22 Nashville $1,200 $267,234 $334,043 $47,604
23 Charlotte $1,200 $267,234 $334,043 $47,604
24 Virginia Beach $1,180 $262,780 $328,475 $46,800
25 San Antonio $1,120 $249,418 $311,773 $44,436
26 Sacramento $1,110 $247,191 $308,989 $44,028
27 Phoenix $1,050 $233,830 $292,288 $41,664
28 Raleigh $1,030 $229,376 $286,720 $40,872
29 Jacksonville $1,000 $222,695 $278,369 $39,672
30 Fort Worth $990 $220,468 $275,585 $39,264
31 Milwaukee $980 $218,241 $272,801 $38,868
32 Colorado Springs $980 $218,241 $272,801 $38,868
33 Omaha $970 $216,014 $270,018 $38,472
34 Las Vegas $950 $211,560 $264,450 $37,704
35 Arlington $940 $209,333 $261,666 $37,296
36 Mesa $930 $207,106 $258,883 $36,900
37 Fresno $880 $195,972 $244,965 $34,896
38 Kansas City $870 $193,745 $242,181 $34,500
39 Louisville $830 $184,837 $231,046 $32,928
40 El Paso $790 $175,929 $219,911 $31,332
Source: Zumper (Median Rent). Mortgage equivalent based on interest rate of 3.625%.  Home price equivalent assumes 20% down payment.  Required income assumes borrower debt and standard debt-to-income ratio

Multiple personal and financial inputs go into the decision of whether to rent or buy a home and we hope this analysis enables people to to better compare their options.   With rising rents and multi-year low interest rates, prospective buyers may be more willing to take the home ownership leap, especially when they understand how much home they can buy with their rent.

How Much Home the Rent Buys in the 20 Most Expensive U.S. Cities

The homeownership rate hit a multi-decade low in 2015.  More people are renting instead of buying due to many factors including tighter lending standards, the inability to save for a down payment and a lack of attractive or affordable housing inventory.  The shift toward renting has caused rents to increase significantly in many cities across the country.  In February the median rent for a one bedroom apartment in San Francisco was $3,460 according to apartment listing website Zumper — for a one bedroom apartment!!!

People rent for many reasons — lifestyle decision, no long term commitment or financial obligation, no fretting about home repairs or fluctuations in property values.  Additionally, it certainly can be challenging to save for a down payment and in some markets you simply cannot buy much home for your money.  But another reason people rent is because they are unaware what size mortgage they can afford.  In many cases, renters would like to buy but they have no idea how far their rent could take them when it comes to getting a mortgage.  With a better understanding of what size mortgage they can afford, based on what they are already paying for rent, renters may realize that buying a home is more attainable than they thought.

FREEandCLEAR used our Rent Payment Mortgage Affordability Calculator to determine the mortgage equivalent for the 20 U.S. cities with the highest median monthly rent.  Simply put, the mortgage equivalent is what size mortgage someone could afford if their monthly mortgage payment was their monthly rent payment.  For example, instead of paying $2,000 a month in rent, what mortgage could you afford with a $2,000 mortgage payment?

The table below shows the mortgage equivalent for the cities with the highest median rent, with a range of approximately $760,000 in San Francisco (based on $3,460 in rent) to approximately $240,000 in Houston (based on $1,090 in rent).  There are a couple of important caveats to the analysis.  First, the analysis shows the mortgage amount based on the rent payment but homeowners are also required to pay additional expenses such as hazard insurance and property taxes.  These extra expenses, however, are offset by the mortgage interest tax deduction benefit so in many situations, homebuyers come out more or less even.  The analysis below suggests people who are renting in many of these cities could afford relatively large mortgages.

City Median Rent
One Bedroom		 Mortgage
Equivalent
1 San Francisco $3,460 $758,687
2 New York $3,000 $657,821
3 Boston $2,300 $504,329
4 Washington D.C. $2,000 $438,547
4 Oakland $1,980 $434,162
6 San Jose $1,900 $416,620
7 Los Angeles $1,760 $385,921
8 Miami $1,750 $383,729
9 Chicago $1,670 $366,187
10 Seattle $1,639 $359,389
11 San Diego $1,480 $324,525
12 Philadelphia $1,350 $296,019
13 Minneapolis $1,320 $289,441
14 Denver $1,300 $285,056
15 Portland $1,300 $285,056
16 Atlanta $1,150 $252,165
17 Dallas $1,150 $252,166
18 Long Beach $1,100 $241,201
19 Baltimore $1,100 $241,201
20 Houston $1,090 $239,008
Source: Zumper (Median Rent). Mortgage equivalent based on interest rate of 3.625%

It is interesting to understand what size mortgage you can afford based on your rent payment but it is important to highlight that just because you can afford a mortgage payment does not mean you can qualify for the mortgage.  Your credit score, financial profile, lender qualification requirements and other factors will determine your ability to get a mortgage.  Of particular interest to prospective home buyers is how much money they need earn to qualify for a mortgage.  

The table below shows the annual gross income required to qualify for the mortgage equivalent in each city.  For example, to qualify for an approximately $760,000 mortgage in San Francisco requires approximately $137,000 in annual gross income as compared to approximately $43,000 in gross income for an approximately $240,000 mortgage in Houston.  Because lenders look at an applicant’s debt in addition to their income we assumed a level of borrower debt as a percentage of income for the analysis.         

It is important to put the required income figures into context so we also included the median gross income for the city.  If the required income to qualify for a mortgage is above the median city gross income that means fewer people in the city make enough money to qualify for the mortgage based on what they are paying for rent.  If the required income to qualify for a mortgage is below the median city gross income that means more people make enough money to qualify for a mortgage.

 
It is interesting to highlight that in sixteen of the twenty cities, the median city gross income is higher than the required income to qualify for a mortgage which suggests more renters should be buying.  On the flip side, New York (~$38,000) and San Francisco (~$35,000) have the largest gap between the median city gross income and the income required to qualify for a mortgage based on monthly rent.  This significant difference implies that the percentage of renters who actually make enough money to qualify for a mortgage to buy a home is much lower than in other cities.

City Mortgage
Equivalent		 Required Annual
Gross Income		 City Median
Gross Income
1 San Francisco $758,687 $137,232 $101,900
2 New York $657,821 $119,004 $80,700
3 Boston $504,329 $91,236 $98,500
4 Washington D.C. $438,547 $79,332 $109,200
4 Oakland $434,162 $78,528 $98,500
6 San Jose $416,620 $75,372 $106,300
7 Los Angeles $385,921 $69,804 $67,900
8 Miami $383,729 $69,432 $57,500
9 Chicago $366,187 $66,228 $76,000
10 Seattle $359,389 $65,004 $89,600
11 San Diego $324,525 $58,704 $73,000
12 Philadelphia $296,019 $53,568 $81,100
13 Minneapolis $289,441 $52,368 $86,600
14 Denver $285,056 $51,564 $79,900
15 Portland $285,056 $51,564 $73,900
16 Atlanta $252,165 $45,636 $68,300
17 Dallas $252,166 $45,636 $70,400
18 Long Beach $241,201 $43,632 $67,900
19 Baltimore $241,201 $43,632 $89,600
20 Houston $239,008 $43,236 $69,300
U.S. Median Annual Gross Income $65,800
Source: Required income assumes borrower debt and standard debt-to-income ratio.  Median income data uses the greater of HUD or FHFA median family income

Determining what size mortgage you can afford is one thing but determining what price home you can afford is another.  Home buyers are typically required to make a down payment of 10% – 20% of the property purchase price.  In the table below we show the home price based on the mortgage equivalent in each city assuming a 20% down payment.  For example, based on the median rent in San Francisco, the mortgage equivalent is approximately $760,000, and assuming you make a 20% down payment you could buy an approximately $950,000 home.  Granted, coming up with a 20% down payment (~$190,000 in the San Francisco example) is highly challenging for many home buyers and it is certainly possible to buy a home with a lower down payment but the analysis shows how much home a renter could potentially afford in these cities.

The table also includes the city median home price so you can compare the home price based on the rent to the home sales price for each city.  In sixteen of the twenty cities, home price based on rent is higher than median home price which suggests that more renters could afford to buy homes in those cities.  Cities with a home price based on rent lower than the median home price may have less affordable housing inventory for renters who want to buy.

City Mortgage
Equivalent		 Home Price
Equivalent		 City Median
Home Price
1 San Francisco $758,687 $948,359 $782,300
2 New York $657,821 $822,276 $475,900
3 Boston $504,329 $630,411 $403,900
4 Washington D.C. $438,547 $548,184 $385,200
4 Oakland $434,162 $542,703 $782,300
6 San Jose $416,620 $520,775 $950,400
7 Los Angeles $385,921 $482,401 $476,800
8 Miami $383,729 $479,661 $283,800
9 Chicago $366,187 $457,734 $218,900
10 Seattle $359,389 $449,236 $379,700
11 San Diego $324,525 $405,656 $542,600
12 Philadelphia $296,019 $370,024 $223,700
13 Minneapolis $289,441 $361,801 $225,100
14 Denver $285,056 $356,320 $353,600
15 Portland $285,056 $356,320 $312,100
16 Atlanta $252,165 $315,206 $173,600
17 Dallas $252,166 $315,208 $207,200
18 Long Beach $241,201 $301,501 $476,800
19 Baltimore $241,201 $301,501 $242,800
20 Houston $239,008 $298,760 $213,400
U.S. Median Existing Home Price $223,900
U.S. Median New Home Price $278,800
Source: Home price equivalent assumes 20% down payment.  City median existing home price data from National Association of Realtors. Median new home price from U.S. Census

It is important to emphasize that the tables above show the mortgage and home price equivalents based on the median one bedroom apartment rent in each city.  But many prospective home buyers rent two bedroom apartments and you could argue that an individual or family renting a two bedroom residence is more inclined to buy a home than someone in a one bedroom residence. 

The table below shows the mortgage equivalent, home price equivalent and required annual gross income to qualify for a mortgage based on the 20 U.S. cities with the highest median two bedroom monthly rents.  The table amplifies the one bedroom rent findings.  The home price equivalent ranges from a whopping ~$1.275 million in San Francisco (based on $4,650 in monthly rent) to a very respectable $375,500 home price equivalent in Austin (based on $1,370 in monthly rent).  Looking at the two bedroom results reinforces that more renters could consider buying homes.

City Median Rent
Two Bedroom		 Mortgage
Equivalent		 Home Price Equivalent Required Annual Gross Income
1 San Francisco $4,650 $1,019,622 $1,274,528 $184,464
2 New York $3,600 $789,385 $986,731 $142,800
3 Washington D.C. $2,770 $607,388 $759,235 $109,872
4 Boston $2,670 $585,460 $731,825 $105,900
5 Los Angeles $2,500 $548,184 $685,230 $99,168
6 San Jose $2,380 $521,871 $652,339 $94,404
7 Miami $2,300 $504,329 $630,411 $91,236
8 Oakland $2,270 $497,751 $622,189 $90,036
9 Chicago $2,220 $486,787 $608,484 $88,068
10 Seattle $2,150 $471,438 $589,298 $85,296
11 San Diego $1,840 $403,463 $504,329 $72,996
12 Minneapolis $1,700 $372,765 $465,956 $67,428
13 Denver $1,650 $361,801 $452,251 $65,472
14 Long Beach $1,600 $350,838 $438,548 $63,468
15 Dallas $1,550 $339,874 $424,843 $61,500
16 Portland $1,450 $317,947 $397,434 $57,528
17 Philadelphia $1,400 $306,983 $383,729 $55,536
17 Atlanta $1,400 $306,983 $383,729 $55,536
17 Baltimore $1,400 $306,983 $383,729 $55,536
20 Austin $1,370 $300,405 $375,506 $54,336
Source: Zumper (Median Rent). Mortgage equivalent based on interest rate of 3.625%.  Home price equivalent assumes 20% down payment.  Required income assumes borrower debt and standard debt-to-income ratio  

Being able to afford a mortgage is only one of many factors that go into the decision to buy a home.  Our analysis suggests that in many cities buying a home may be more feasible for renters than they think.  Many people weighing renting versus buying do not think home ownership is attainable but climbing rents and low interest rates could make home ownership more attractive.  Plus your rent dollars may take you farther than you think when it comes to getting a mortgage and buying a home.

Use This Trick to Cut Your Mortgage in Half (Hint: There is No Trick)

We have all seen ads floating around the Internet that promise to let you in on a special secret that magically cuts your mortgage in half.  The ads scream “Use this Trick to Cut Your Mortgage in Half” or “This Mortgage Secret has Banks on Edge — Will Save You Thousands” or how about “This Obama Program Takes 15 Years Off Your Mortgage.”  The exact verbiage of the ads may be a bit different but you get the idea.  The ads are ubiquitous and enticing — who wouldn’t want to cut their mortgage in half?  

 

At FREEandCLEAR, we are passionate borrower advocates and always seeking new ideas to help people save money on their mortgage so we decided to dig a little deeper.  Could there really be a government program, secret, trick or perhaps a magic wand that cuts your mortgage in half?  Much to our dismay, these claims fall under the category of too good to be true.  Most of the ads direct people to online forms where you are requested to submit your personal information and in return for providing your information you are contacted by multiple mortgage lenders.  There is nothing wrong with requesting someone’s contact information and we are certainly proponents of comparing lenders when you shop for a mortgage.  Not surprisingly, however, these websites do not offer borrowers miraculous tricks or magical spells to slice their mortgage in half, so the ads are misleading at best.

 

But what if we wanted to actually cut our mortgage in half? Is that even possible or simply a false myth promulgated by deceptive Internet ads?  It turns out that there are legitimate ways to cut your mortgage in half (or nearly half) and none of them involve tricks.

 

Select a 15 Year Mortgage Term

The easiest way to cut your mortgage in half is to literally do just that.  Most borrowers select a 30 year mortgage because it offers them the lowest mortgage payment which allows them to qualify for a larger mortgage amount and buy a nicer home.  Selecting a 15 year mortgage, so literally cutting the length of your mortgage in half, can save you tens of thousands or even hundreds of thousands of dollars in interest expense over the life of your mortgage.  A 15 year mortgage enables borrowers to save money two ways.  First, by cutting the term in half, you pay off your mortgage in half the time which means you pay a lot less interest.  Second, the interest rate for a 15 year mortgage is lower than the interest rate for a 30 year mortgage.  So not only do you pay interest for a shorter period of time but you pay a lower interest rate.  The downside of a 15 year mortgage is that the monthly payment is higher.  The example below illustrates the difference in interest rate, monthly mortgage payment and total interest expense over the life of the loan for a $300,000 30 year mortgage as compared to a 15 year mortgage. 

 

Example: Comparing a 30 Year Mortgage to a 15 Year Mortgage

30 Year Mortgage

Interest Rate: 3.625%

Monthly Payment: $1,368

Total Interest Expense Over Mortgage: $192,534

 

15 Year Mortgage

Interest Rate: 2.750%

Monthly Payment: $2,036

Total Interest Expense Over Mortgage: $66,455

 

Based on today’s interest rates, a borrower would saves $126,080 in total interest expense over the term of the mortgage with a 15 year mortgage as compared to a 30 year mortgage but the monthly mortgage payment for the 15 year mortgage is $670 higher.  It is important to highlight that the higher the interest rate and greater the mortgage amount, the more money you save with a shorter mortgage.  As the example demonstrates, if you can afford making a higher monthly payment, selecting a 15 year mortgage enables you to cut your mortgage in half and save thousands of dollars in interest expense over the life of your mortgage.

 

Mortgage Acceleration

Another way to shave years off your mortgage is by using mortgage acceleration, or paying more than your required monthly mortgage payment.  In essence, by overpaying your mortgage, acceleration enables you to pay down your principal balance faster which reduces the length of your mortgage.  By reducing the length of your mortgage you reduce your total interest expense over the life of your mortgage (as exhibited above when we compared a 15 year mortgage to a 30 year mortgage).  The length of time you reduce your mortgage by and amount of interest expense you save depends on how much you accelerate your mortgage.  The more you overpay, the quicker you pay off your mortgage and the more money you save.  The example below demonstrates how mortgage acceleration works by comparing a $300,000 30 year fixed rate mortgage where the borrower makes the required monthly payments to an accelerated mortgage where the borrower overpays by $500 every month over the life of the loan.  By accelerating the mortgage the borrower reduces the mortgage term by 11 years and 8 months saves $82,074 in interest expense over the life of the mortgage.  You can use the Mortgage Acceleration Calculator on FREEandCLEAR to evaluate different overpayment amounts for your mortgage.      

 

Example: Mortgage Acceleration

30 Year Mortgage

Monthly Payment: $1,368

Mortgage Length: 30 years

Total Interest Expense Over Mortgage: $192,534

 

30 Year Mortgage with Mortgage Acceleration

Monthly Payment: $1,368

Monthly Overpayment: $500

Mortgage Length: 18 years and four months

Total Interest Expense Over Mortgage: $110,460

Total Interest Expense Savings: $82,074

 

Mortgage acceleration is ideal for borrowers who are looking to reduce their mortgage term but want to preserve the option of making the lower 30 year mortgage payment.  One creative way to think about mortgage acceleration is to get a mortgage with a 30 year term but make the same payment that you would with a 15 year mortgage.  That way you maintain the flexibility of having a lower required monthly mortgage payment that goes along with a longer mortgage term (in case you cannot afford to make the higher payment), but you pay off your mortgage in 15 years and save hundreds of thousands of dollars in interest expense.

 

The good news about mortgage acceleration is that it is the borrower’s choice completely.  You could decide to accelerate your mortgage by $500 one month, $1,000 the next month and then make your required payment the following month.  You can apply mortgage acceleration at any time — for the entire term of your loan or you can start and stop years into your mortgage.  Additionally, you do not incur any additional cost by accelerating your mortgage.  Simply add the overpayment amount to your monthly or bi-weekly mortgage payment and indicate to your lender that the extra amount goes to pay down your principal balance (either in the comments section of your check or by contacting your lender if you use auto pay).  Although you would have to pay significantly more than your scheduled payment to literally cut your mortgage in half, mortgage acceleration can be a powerful tool for borrowers to eliminate years and thousands of dollars from your mortgage.

 

So do not let the ads fool you — there is no shortcut to cutting your mortgage in half.  And selecting a shorter mortgage or applying mortgage acceleration are certainly not mortgage industry secrets.  All borrowers need is the right information, sound financial planning and a little discipline to trim years from their mortgage and save thousands of dollars.