A while back, we published an overview of the home loan process in California. That…
“How much income will I need to buy a home in the Bay Area, in 2021?”
This is a common question among home buyers these days, and with good reason. House values in most parts of the San Francisco Bay Area have risen steadily throughout 2020, with additional gains expected in 2021. That leaves a lot of folks wondering the same thing: How much income is needed to qualify for a mortgage loan and buy a house in the Bay Area?
The short answer is that you need sufficient income to cover your monthly mortgage payments, with some money left over. To calculate this, mortgage lenders use something known as the debt-to-income ratio.
We’ll talk more about that ratio in a moment. But first, let’s look at current home-price trends across the Bay Area.
Bay Area Home Prices Rising, as We Approach 2021
If you were to look at recent home-price trends in our area — and nothing else — you wouldn’t even know there was a health crisis and recession taking place. That’s how strong they’ve been.
According to a report published earlier today by the California Association of Realtors (C.A.R.), the statewide median home value rose by 17.5% from September 2019 to September 2020. And all of that despite the ongoing effects of the coronavirus pandemic.
As a result of these trends, Bay Area home buyers seeking a mortgage loan need a higher level of income today than they did in the past. That’s a natural extension of rising prices. The question is, how much higher? And how will this play out as we move into 2021?
In other words: How much income does a person need to buy a house in the Bay Area, in 2021?
To answer this question, we first need to consider the differences in home prices across the region. It’s a pretty broad spectrum, from Solano County on the lower end to San Mateo on the higher end.
Based on the November 2020 C.A.R. report mentioned above, here are the median sale prices for existing single-family homes in all nine Bay Area Counties:
- Alameda: $1,049,000
- Contra Costa: $787,250
- Marin: $1,468,500
- Napa: $749,380
- San Francisco: $1,625,000
- San Mateo: $1,680,000
- Santa Clara: $1,442,500
- Solano: $508,000
- Sonoma: $720,000
These are the median price points for homes sold during October 2020. The “median” is essentially the midpoint for the housing market. Half of all homes sell above it, while the other half self for less. This gives us some insight into what a “typical” home would cost in each county.
It’s also important to realize that prices in many Bay Area cities are still climbing, as of fall 2020. And that could continue well into 2021, especially in the highly competitive East Bay housing market. So buyers who postpone their purchases until later next year could encounter higher home values — along with higher income requirements.
Income Needed to Buy a House
So, how much income would you need to buy a home in these Bay Area counties?
For those home buyers who use a mortgage loan to finance their purchases (which is most buyers), they’ll have to meet the lender’s debt-to-income ratio requirements. DTI standards and limits can vary slightly from one bank or mortgage company to the next.
With that being said, many lenders set the bar somewhere around 45%. This means that if your combined monthly debts — including the mortgage payment — exceed 45% of your gross monthly income, it might be harder to qualify for financing.
This is not a hard-and-fast rule. Exceptions are often made for borrowers who are otherwise well-qualified for a loan. Mortgage lenders look at a variety of factors when considering loan applications. The borrower’s income is just one piece of a bigger picture.
C.A.R. Analysis of “Minimum Qualifying Income”
Earlier this month, the California Association of Realtors did an analysis to find out how much income would be needed to afford the monthly payments on an average-sized mortgage loan in all nine Bay Area Counties.
They used the median home value for each county to calculate the monthly payments (including tax and insurance) on a 30-year fixed-rate mortgage at 3.15% interest. They also assumed a 20% down payment, which is not always required thanks to mortgage insurance.
|County||Median Home Price||Monthly Payment||Minimum Income|
So this gives you some idea of how much income you might need to buy a typical home in the Bay Area with 20% down. If you made a smaller down payment, you would end up with a larger loan amount and a higher income requirement. There’s a tradeoff to be made here.
According to that same report, housing affordability in most Bay Area counties declined in recent months. That’s a direct result of rising house values. But in San Francisco itself, affordability actually rose due to a dip in prices.
To quote their November 12th report:
In the San Francisco Bay Area, [housing] affordability improved from third-quarter 2019 only in San Francisco and Sonoma counties and held steady in two (Marin, Santa Clara). Affordability declined in the remaining counties (Alameda, Contra Costa, Napa, San Mateo, and Solano). A 2.6 percent decline in San Francisco County’s median home price during third-quarter 2020 and lower interest rates contributed to the improvement in affordability from both the previous quarter and year.
Bridgepoint Funding Is Here to Help
The figures shown above are hypothetical and therefore don’t apply to all mortgage scenarios. Every mortgage loan is different, because every borrower is different. That’s why it’s important to speak with a knowledgeable loan officer or mortgage broker about your particular financing situation.
Bridgepoint Funding has been meeting the needs of Bay Area home buyers and homeowners for nearly 20 years. We can review your financial situation and home-buying goals to tell you how much income you might need to buy a house. We could also pre-approve you for a loan, to facilitate the house-hunting process.
Please contact us today with any mortgage-related questions you have!