A Guide to Mortgage Affordability for First-Time Buyers

Buying your first home is an exciting, important step toward financial stability and independence and one that requires careful financial planning. However, before you start house hunting, it's crucial to have a realistic understanding of your mortgage affordability. South Dakota Housing is here to provide you with a practical guide to help you crunch the numbers and make informed decisions as a first-time homebuyer. We're sharing relevant stats to help you understand the homebuying landscape and make informed decisions.

The Basics of Mortgage Affordability

Understanding what you can afford is the first step in your homeownership journey. Your monthly mortgage payment should fit comfortably within your budget, allowing you to maintain financial stability while enjoying your new home.

Here are the key factors to consider:

1. Downpayment

The downpayment is the initial amount you pay toward your home's purchase price. A larger downpayment can lower your monthly mortgage payments and potentially reduce the interest rate on your loan. 

The average downpayment made by first-time homebuyers in 2022 was approximately 6-7% of the home's purchase price. However, it's worth noting that various loan programs, such as South Dakota Housing’s Downpayment Assistance Program allow for downpayments as low as 3% for eligible buyers.

2. Monthly Income

Your monthly income, including your salary and any additional sources of income, is a critical factor in determining your mortgage affordability. 

According to the US Census Bureau, as of 2022, the median household income in South Dakota was around $63,920 per year.

3. Debt-to-Income Ratio (DTI)

Lenders assess your DTI, which compares your monthly debt payments to your income. A lower DTI indicates a lower financial risk to the lender. Lenders typically look for a DTI below 43%.

4. Credit Score

Your credit score significantly influences the interest rate you'll receive on your mortgage, affecting your monthly payments. A higher score can lead to more favorable terms. The national average FICO credit score is 714.

Steps to Calculate Your Mortgage Affordability

Now that you have a grasp of the fundamentals, here's a practical guide to help you calculate your mortgage affordability:

1. Determine Your Budget

Start by assessing your monthly income and expenses. Calculate your debt-to-income ratio (DTI) to understand how much of your income goes toward debt payments.

2. Estimate Your Downpayment

Consider how much you can comfortably allocate for a downpayment. Remember that a larger downpayment can reduce your monthly mortgage costs.

3. Explore Loan Options

Research the types of mortgage loans available to you. FHA, VA, and conventional loans have varying downpayment requirements and terms.

4. Calculate Your Mortgage Payments

Use online mortgage calculators to estimate your potential monthly payments based on your downpayment, interest rate, and loan term.

5. Consider Additional Costs

Factor in additional homeownership costs, such as property taxes, homeowner's insurance, and maintenance expenses.

6. Stay Realistic

Be conservative in your estimates and ensure your mortgage payments fit comfortably within your budget, allowing room for unexpected expenses.

South Dakota Housing's Support

South Dakota Housing commits to helping first-time buyers navigate the complexities of homeownership. We offer valuable resources and programs tailored to the needs of South Dakota residents, including downpayment assistance and affordable loan options.

If you're ready to embark on your homeownership journey or need guidance on assessing your mortgage affordability, don't hesitate to reach out to South Dakota Housing. We're here to provide support at every step.

Remember, understanding and assessing your mortgage affordability is a crucial part of ensuring a successful and financially sustainable homeownership experience. With careful planning and the right resources, you can confidently take the leap into homeownership as a first-time buyer.

Check out our home affordability calculator to determine the right home price for you.