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What is the Affordability Index?

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  • Written By: wiseGEEK Writer
  • Edited By: O. Wallace
  • Last Modified Date: 14 October 2018
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An affordability index is a measurement of your income/to house price ratio that determines whether you can afford a house, what type of house you can afford, and whether or not you’re in an income range that will make you attractive to lenders. These indices can be published by cities, states, growing communities, and by a variety of other sources in order to help you gauge your potential to be a homeowner. Some affordability index types also consider how living in certain locations might lower your costs or raise them for things like transportation.

Many affordability indexes rate a potential homebuyer on the basis of percentage. If you are rated at 100% this means that a house in your price range should be able to be purchased by you based on the income you earn. When you have less than 100%, most lenders consider you as less than able to afford a home. Generally, your income should equal about a third of the total loan amount with ability to pay 5% down. This can go up or down with increases or drops in interest rates, and the houses you may be able to afford can change with housing prices.

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Another type of affordability index looks at the number of people who can afford to buy a home in a specific community. This is evaluated on percentage too, and is based on median or mean income of the community. In some communities, an affordability index can show that too few people are able to buy a home based on the income they make. This can help local employers know what type of salaries they might need to offer workers in order to attract them to their business or keep them in the area, and it may also let people selling homes know how to price their homes. The lower the affordability index percentage is for a whole community, the less people will be able to afford to purchase even the most basic homes. If an affordability index of this type shows that only 25% of the people in the community can afford a house, then there can be significant problems with selling homes.

Most affordability indices don’t take into account creditworthiness, which is an important consideration for lenders. Bad credit can render the affordability index relatively useless on an individual basis, unless the loan you take out is very small. If your credit is fairly sound, these indices can help you decide when and where you could buy your first home, and whether or not a bank will consider you qualified to take a loan of a certain size. If your dream of owning a home is not one that can occur in the community you live in, you may be able to find someplace else where you can afford a house, though to do this, your salary must remain equal to or greater than the stated amount on the index.

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