With every passing month, Fort Collins' median home prices jump up another $10,000, or so it seems, pricing many buyers out of the market.
The good news is interest rates remain ridiculously low, which helps increase buying power if you are lucky enough to find a house you can afford in this overheated market.
At the end of the first quarter in March, Fort Collins' median sales price for a single-family home was $498,750. By the end of April, the city's median home price year-to-date was $510,215.
If that's not sobering enough, the median sales price for the 178 homes sold in Fort Collins last month alone pushed its way to $525,000, an 18% increase from April 2020.
Median price means half the homes sold were above that price and half were below. The median price is often more reliable than an average because it can't be skewed by one or two very expensive properties being sold.
At the end of last year, the median price for a home in Fort Collins was $455,000, which in today's market sounds like a steal.
That got us thinking about how much a would-be buyer or family would need to earn to afford a $500,000 home. The short answer: not as much as you might think if you have lots of money for a down payment, excellent credit and no other debt. If you don't — and most of us don't — it will take a bundle to pay for a new house in the Choice City.
Most of us probably can't save $100,000 to put 20% down, and few people live completely free of a car payment or monthly credit card bill.
With the help of loan officer Jessica Foster of NoCo Home Loans, we ran several scenarios to gauge just how big your paycheck needs to be if you're eying a $500,000 home.
Foster said the typical buyer tends to have about $1,000 in monthly debt, including car payments, credit cards and student loans, a credit score of 700 or above and 5% to 10% to put toward a down payment.
But there isn't a one-size-fits-all scenario when it comes to personal finances. Credit scores, debt-to-income ratio and down payment are as individual as the buyer.
Debt-to-income ratio measures what percentage of income goes to pay your household debt every month. the U.S. Department of Housing and Urban Development considers a household to be cost burdened if they pay more than 30% of their income on housing costs alone.
Conventional lenders will allow consumers to spend up to 45% of their gross pay on all debt combined, including a mortgage payment. Federal Housing Authority, FHA, and VA loans can go up to 55%, Foster said.
Interest rates will vary depending on credit scores and down payments and will be slightly lower than the APR, which reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. Foster said the APR needs to be quoted but consumers don't pay that rate. For the purpose of this story, assume the APR on each scenario is slightly higher than the interest rate stated.
Let's take a look at some scenarios for buying a single-family home with a $500,000 price tag and a 30-year, fixed rate mortgage:
Scenario 1: A best-case scenario
A buyer has an excellent credit score of 720 or higher, no other debt, 45% debt load and $100,000 (20%) to put down. The interest rate would be 2.875% with an annual percentage rate of 2.983, Foster said.
With everything perfect, this buyer would have a purchase price of $400,000. Including principal, interest, taxes and insurance, also known as PITI, the monthly mortgage would be $2,010. Your gross annual pay would have to be about $70,000, or $5,833 per month.
Broken down further, your hourly pay would need to be $33.65. The salary is slightly above Fort Collins' median income of $67,200. It's not too bad, especially if there are two wage earners, but far above what many Fort Collins residents are paid.
This scenario is highly unrealistic given the size of the down payment and no other debt.
So let's look at something more realistic.
Scenario 2: Good credit, smaller down payment, more debt
The buyer has $50,000 (10%) down, a good credit score of about 680 and $2,000 in other monthly debt obligations.
Because conventional financing is credit score driven, the 680 score drives up interest rates to 3.125%, Foster said. With PITI and mortgage insurance the payment would be roughly $2,442 per month.
Required salary: $120,000.
"The $2,000 debt is kind of painful," Foster said. "If a household had that kind of debt, I would assume it's a two-person household with two vehicles.
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"If you don't have a 700 credit score, FHA might be a better way to go because mortgage insurance is lower than a conventional loan," she said.
And mortgage insurance through a conventional loan goes away when you achieve 20% equity in your home. "In this market you can probably get rid of it in a couple years."
FHA financing has different requirements for mortgage insurance. If you put down less than 10% mortgage insurance lasts for the life of the loan, Foster said. If you put down 10%, FHA requires mortgage insurance for 11 years and you must have 20% equity to remove it.
Cutting this buyer's debt in half, to $1,000 a month, makes a huge difference in salary requirements, Foster said.
A buyer with everything but the high debt load could get into that house with a $90,000 income.
Scenario 3: Fair credit, some debt
The buyer puts 5% down ($25,000), has fair credit below 680 and $1,000 in monthly debt. The buyer would still qualify for a 2.875% interest rate, but mortgage insurance would go up to about $245 per month because of the lower credit score and smaller down payment, Foster said.
With $1,000 in other debt, the buyer's total debt load would be $3,575 per month, including a $2,575 mortgage.
Income needed to afford that, Foster said, would be about $110,000, or $52.88 per hour.
Now, just for fun, let's look at a jumbo loan, which is considered anything over $540,000, Foster said.
Scenario 4: The jumbo loan
An $850,000 home with 11% down and a credit score over 740 and no other debt would translate to a loan amount of $764,915 and qualify for a 3.625% interest rate.
Including principal, interest, taxes and insurance, the payment would be $3,965 per month. Mortgage insurance is built into the interest rate.
The required income to afford such a place: $115,000.
"Everybody would love no debt, but it doesn't always make the most sense to put down 20% because of the mortgage insurance," she said. "Mortgage insurance is not a bad thing."
In these scenarios, paying the mortgage insurance may be more realistic than coming up with another $50,000 or more to hit that 20% down payment, she said.
Foster's advice to anyone thinking about buying a home: Discuss your situation with a loan officer.
"Everybody's scenarios are different," Foster said. "You pay your bills, you have your job, you save money and think everything is fine to buy a house until you run into a loan officer who tells you there are problems."
It could be one missed credit card payment, a mistake on your credit report or other credit issue, she said.
Once a loan officer pulls your credit, gets your financial documents and double-checks your information, your application goes to underwriters who will give the thumbs up or thumbs down.
Her other piece of advice: Get preapproved. "When you are out there writing offers, if a buyer sees you are pre-approved, it has a lot more weight that prequalification."
Fort Collins median single-family home price
January to December
* January to April
Source: Fort Collins Board of Realtors
Pat Ferrier is a senior reporter covering business, health care and growth issues in Northern Colorado. Contact her at email@example.com.
This article originally appeared on Fort Collins Coloradoan: How much money do you need to earn to afford a $500K Fort Collins home