How to Afford a House in the Bay Area: Tips for Budget-Minded Buyers

“How can I afford to buy a house in the Bay Area?”

This is a common question among hopeful home buyers in our region. And it’s easy to understand why. The San Francisco Bay Area is one of the most expensive real estate markets in the U.S. (for various reasons). So a lot of people wonder how to afford to buy a house in this kind of market.

As of October 2021, the median home price in the San Francisco-Oakland-Hayward metro area was north of $1.3 million. Granted, that’s just the median (or midpoint) for the market. Many homes are priced well below that level. But it’s still a pretty high price tag by anyone’s standards.

How to Afford a House in the San Francisco Bay Area

When it comes to affordability and budget, there are basically three types of home buyers:

• Those who can easily afford to buy a house in the Bay Area
• Those who cannot afford a home purchase in this market
• Those who might be able to afford a purchase with careful planning

This article is intended for the third group, people who need a little help or guidance to afford a home purchase in the Bay Area. If you fall into that category, read on! We’ve offered some some tips, strategies and considerations that could help you in your quest for homeownership.

Create a Budget Before Buying a Home

Before you try to buy a house in the Bay Area, you’ll want to determine how much you can afford to spend each month toward the payments. The sooner you start this process, the better. Here’s how to approach it:

1. Figure out how much money you bring home each month, after taxes are taken out.
2. Determine how much money you spend each month on all of your non-housing expenses. This should include everything except for your current rent or house payment (since that would be replaced by your new mortgage payment).
3. When adding up your expenses, be sure to include any money you want to contribute toward savings each month.
4. Add the amounts from steps #2 and #3, and then subtract them from the amount in step #1. In other words, subtract your total monthly non-housing expenses from your net monthly income. Write this number down — it’s important.
5. When considering your monthly mortgage payment, you need to make sure they do not exceed the number you wrote down in step #4. Ideally, your monthly payment should be less than the difference between your income and expenses, so you can maintain some emergency funds.

Save Money for Your Housing Costs

Creating a home-buying fund can help you afford to buy a house in the Bay Area. The more money you can save now, the better off you’ll be when it comes time to close on the house. At a minimum, you’ll need enough money in the bank to cover your down payment (if applicable) and closing costs.

1. Start by considering the potential costs of buying a house. Unless you use the VA loan program, you’ll probably have a down payment of some kind. It might range from 3% to 10%, or more in some cases. You might also have closing costs, which can add up to thousands of dollars.
2. Think about the items you spend money on each month. Some of them are necessities — others are luxuries. Which of the luxuries can you do without? If you dine out or “Door Dash” a lot, consider making more dinners at home. Apply this same discipline to everything you do, between now and your closing day.
3. Consider creating a separate savings account for your housing fund. If you dip into your checking account on a daily basis with your debit card, it might be better to have a separate account for your home-buying fund. That way, you won’t chip away at those funds without realizing it.
4. Every time you’re about to buy something you don’t absolutely need, remember your priorities. Think about that Bay Area house you want to buy, and how you’re going to need every extra cent to make it happen. Do you really need that new TV set right now? Probably not.

Choose the Right Mortgage for Your Situation

We talked about the importance of establishing a budget and saving money, so you can afford a house in the Bay Area. Now it’s time to consider the different mortgage options available to you:

1. Consider the differences between FHA loan and conventional mortgage. This is one of the key decisions you will have to make when buying a home. The minimum down payment for an FHA loan is 3.5%. Conventional mortgage loans allow for a down payment as low as 3%, in some cases.
2. Another important decision is whether you want to use a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). With a fixed mortgage, your interest rate will never change; but you’ll probably pay more in interest during the first few years. With an ARM  loan, you could secure a lower mortgage rate; but the rate can change over time.
3. You might find it easier to afford a house in the Bay Area if you use gift money for your down payment. This is when a third party (such as a family member) contributes funds toward your down payment. Many home buyers use this strategy to overcome the affordability hurdles of buying in the Bay Area.

Consider the Location Carefully

The Bay Area real estate market can be pricey. But some cities are more affordable than others. If you have some flexibility when it comes to your location, be sure to consider all cities across the region.

This is something we’ve written about in the past. For instance, we wrote a separate blog post about Solano County being the most affordable housing market in our region, in terms of home prices.

The point is, you might have an easier time affording a house in the Bay Area if you cast your net far and wide.