Believe it or not, income is not all there is to determining buying power, especially in the housing markets around the Greater Los Angeles area. It’s why two households earning a salary of, say, $200,000, can be restricted to different price ceilings, neighborhood options, and property types. In fact, there is no single deciding factor. Buying power instead is more often informed by the nexus of area market conditions, local costs, and lenders.
Looking Beyond Income to DTI
First-time homebuyers often limit their considerations to gross income when preparing to meet with mortgage lenders. However, lenders tend to also fixate heavily on debt-to-income ratio (DTI). This factor means that monthly payments (student loans, car payments, credit card debt, alimony/child support, etc.) are also taken into consideration and contrasted against monthly income. In most cases, the more debt one has, the less they can borrow.
Restrained by Debt
It’s no secret that home prices around Los Angeles tend to skew on the high side. This also significantly reduces a prospective homeowner’s buying power. A buyer with a household income of $200,000 and minimal debt could feasibly qualify for a larger loan than a buyer with the same income but higher monthly obligations. In fact, the debt could reduce buying power by hundreds of thousands of dollars!
Not All Properties Are Created Equal
The type of property a buyer wants also influences buying power. A condo is going to be treated differently by a lender than a single-family home. And these different property types also require consideration of different recurring costs. For example, monthly HOA dues will reduce DTI. Or certain condos may demand larger down payments. And then there are factors like insurance for homes in fire-prone areas that can dramatically reduce affordability. With this in mind, it becomes easier to see how two buyers with identical incomes could consider homes with the same listing price, with only one buyer qualifying once HOA dues, insurance, and taxes are assessed.
Non-Income Methods of Inflating Buying Power
Even if income is equal, liquidity likely isn’t. Often, buyers faced with larger down payments reduce the size of their loan. This can improve DTI, lock in better interest rates, and make tight bids more competitive. Appraisal gaps are commonplace in competitive neighborhoods around Los Angeles, so having cash reserves can amplify buying power, even without an increase in income.
Location, Location, Location
In a city with the sprawl of Los Angeles, there isn’t a single market to focus on, but rather a network of connecting micro-markets. And property taxes, insurance premiums, utility costs, and even factors like maintenance considerations can vary drastically from location to location. A buyer in love with a hillside property will likely need to contend with higher insurance premiums than if they chose a home on flat land. Someone buying a brand new condo would have lower maintenance costs but higher HOA dues. These are just some of the ways that localized expenses can impact affordability as much as price.
Credit Where Credit is Due
Credit scores matter, too. Two buyers with the same income but different credit scores may qualify for different interest rates. Even the smallest rate difference can influence monthly payments and loan approval amounts, especially in a market like LA’s.
With Buying Power, Income is Just the Beginning
Income, debt, assets, credit, property type, location-related costs: all of these work together to form the picture of an individual’s buying power. But with so many factors at play, it’s no wonder that one buyer’s pre-approval numbers may not equate to the same real-world options as another’s, even if they have the same salary. It’s important to understand this caveat when orchestrating a buying strategy resilient enough for LA’s nuanced array of housing markets.
With a brand that says as much as JohnHart’s, Senior Copywriter Seth Styles never finds himself at a loss for words. Responsible for maintaining the voice of the company, he spends each day drafting marketing materials, blogs, bios, and agent resources that speak from the company’s collective mind and Hart… errr, heart.
Having spent over a decade in creative roles across a variety of industries, Seth brings with him vast experience in SEO practices, digital marketing, and all manner of professional writing with particular strength in blogging, content creation, and brand building. Gratitude, passion, and sincerity remain core tenets of his unwavering work ethic. The landscape of the industry changes daily, paralleling JohnHart’s efforts to {re}define real estate, but Seth works to maintain the company’s consistent message while offering both agents and clients a new echelon of service.
When not preserving the JohnHart essence in stirring copy, Seth puts his efforts into writing and illustrating an ongoing series entitled The Death of Romance. In addition, he adores spending quality time with his girlfriend and Romeo (his long-haired chihuahua mix), watching ‘70s and ‘80s horror movies, and reading (with a particular penchant for Victorian horror novels and authors Yukio Mishima and Bret Easton Ellis). He also occasionally records music as the vocalist and songwriter for his glam rock band, Peppermint Pumpkin.
