Affordability Ratio
Affordability is a term used to describe the ability of a person or entity to pay in relation to the income earned by them. Affordability is the comparison of a person's income against their liabilities. The extent to which something is affordable can be described as an affordability ratio. For example, some people might be able to purchase a luxury car because it is affordable when considering their high income, while for others, owning an expensive car is not affordable because of their low income.
Affordability ratio in real estate
If we are to define affordability ratio in real estate, household expenses in relation to the income within the same household is the affordability ratio. If we deduct the household income from the housing expenditure then we obtain the net affordability ratio. This is useful in order to measure how much the expenses weigh in relation to the housing occupancy and how it affects the household budget.
The income used in order to calculate the affordability ratio includes all streams of income within the household. Retirement pensions, family benefits, financial assets, replacement income, and salaried or non-salaried professional activities contribute to the household income.
This measurement is relevant to determine the home affordability ratio, which tells homebuyers how much they can afford to spend on a house. The affordability ratio is also used by lenders to determine a borrower’s ability to follow monthly loan repayments. Different cities have a different affordability ratio, therefore, the country has cities that are most affordable and cities that are less affordable.
It all comes down to the cost of living when a comparison between two states, cities, or neighborhoods is made. The cost of living in comparison to the median household income can also be considered as an example of the affordability ratio for different cities or areas.
Popular Real Estate Terms
generic name of the form used to file taxes payable to a federal, state, or local government. The tax return includes items such as gross income, deductions, tax credits, and tax due. ...
The rate at which a market can absorb additional units of supply without causing market saturation and severe price distortions. For example, during a recessionary period, many homeowners ...
(1) Method of measurement lumber using the board foot cubic measure. The board measure is used to estimate quantities and prices of lumber materials. (2) Method of estimating lumber ...
See ordinary annuity. ...
The meaning of direct costs implies such expenses that you can connect straight to a particular goods’ or service’s production, manufacturing, and preparation. As opposed to ...
Same as term graduated lease: A rental stipulation a varying rental rate. Rental rate are determined tied to periodic appraisals or an inflation or an inflation index. The provision is more ...
As a collective noun, land cost means the total cost of purchasing a parcel of land or lot with specific land use and ownership. The land cost includes the purchase price, closing costs, ...
Amount paid to a person or business for bringing the parties together in a business arrangement. The finder may also act in a consulting capacity. The fee may be a flat amount or rate, a ...
Maybe you’re studying for your real estate exam, or you heard the word from your real estate agent and didn’t know what it means. Whichever your reason, we’ll go ahead and ...
Have a question or comment?
We're here to help.