Americans Now Need to Earn $113,520 Annually to Afford a Typical Home

As if buying a house didn’t already feel unattainable already, a recent report from Redfin shows just how unaffordable housing is right now. The real estate company says that Americans need to earn $113,520 annually just to afford a median-priced home.

To put that into perspective, the typical household earns about $29,500 less than that each year. And if you’re wondering what a median-priced home costs in the U.S. right now, well, you’ll have to fork over $412,778 to get one.

While it can feel hopeless for many people looking to purchase a home, there are few things you can do to improve your financial situation. Here are a few suggestions.

1. Settle for less than your dream home

Many people don’t like the idea of compromising, but when you’re buying a house, it’s rare to get everything you want. With housing affordability at a near 40-year low, compromise is a necessity for most buyers.

Even if you plan on staying in your house longer than a few years, being willing to cut a few must-haves from your wishlist could help you find a cheaper home. This may mean living a little further outside of town than you wanted, having less land than you envisioned, or even buying a fixer-upper.

It’s worth considering that even when people think they’ve bought their dream house, many buyers, especially younger ones, end up selling it quickly anyway. Redfin data shows that 49% of homeowners under 35 sell their homes within three years.

More: Check out our picks for the best mortgage lenders

2. Pay off debt

Mortgage lenders consider many different factors when deciding the size of your mortgage loan. Your income and debt are the two most important.

While you may be able to increase your income with a side hustle, using that extra income to eliminate some of your debt may be a better idea. Lenders typically want a debt-to-income (DTI) ratio below 43% for conventional loans, while FHA loans may allow you to have DTI up to 50%.

DTI is calculated by taking your monthly debt responsibilities (like car loans, credit card payments, personal loans, etc.) and dividing by your monthly income. For example, if your monthly debt payments total $2,000 and your monthly gross income is $6,000, then your DTI would be roughly 33%.

Paying off one credit card to eliminate a few hundred dollars in monthly payments could help you get approved for a higher loan amount.

3. Improve your credit score

Your credit score can have a significant impact on the size of the mortgage loan you’re approved for and the mortgage rate you receive. Credit scores range from 300 to 850 and the higher yours is, the better the rate you’ll be offered.

Let’s say you want to buy a $350,000 house, you’re putting 20% down, your credit score is 670 — which is in the “good” range but not the best — and you get an interest rate quote of 7.3%. Your monthly mortgage payment (principal and interest) would be $1,919 in this scenario.

But let’s say you have a credit score of 740, which is in the “very good” range. With this score, you may be able to get a mortgage rate of 6.9%, which would save you $75 per month.

RELATED: Mortgage Calculator

Making on-time payments accounts for 35% of your credit score, so paying bills on time is the best way to increase your credit score. Reducing your debt is the second-best to improve your score, considering 30% of the score comes from debt obligations.

Tip: I recently boosted my credit score by 28 points by using Experian Boost®. I linked my utility payments and a couple of other bills to my credit report in just two minutes. The service is free, and many people’s scores go up, with an average increase of 13 points.

Housing prices will likely remain high for a while, which means it’s more important than ever to devise a strategy for lowering your monthly costs. Rethinking your housing wishlist, paying off debt, and improving your credit score can all go a long way toward making a house purchase a reality for you, no matter what the market does.

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