So, you are looking to buy a house, you are pre-approved and you are in the process of looking for a house. You and your real estate agent go out nights and weekends to visit homes and decide if the home is right for you and your family.
Here is some information you should know about your pre-approval amount and what you should spend on a house …
The most important thing when buying a home is the mortgage payment. Affordability determines your ability to spend money. If the house isn’t affordable you won’t buy it, it’s quite honestly that easy at the end of the day. The ideal situation is to be able to buy a home where your payments, cash flow, and financial and budget concerns on a monthly basis are met, including the mortgage payment. When we talk about a mortgage payment we are talking about interest on principal, taxes and insurance and any private mortgage insurance that is applicable monthly as the total monthly mortgage payment.
While the purchase price of the house is important, what you will never see after you close the house is the purchase price. The mortgage payment is what you’re going to see month after month over the next 360 months assuming a 30 year fixed rate mortgage. This is where the rubber meets the road when it comes to your pre-approval and contracting for the home. Let’s say you are pre-approved for $ 550,000 with an FHA insured mortgage. The lender has let you know that this is actually your maximum purchasing power based on your payment and debt-to-income ratio. Let’s say after a few unsuccessful attempts to bid in this price range on the advice of your real estate agent on a whim, you decide to bid up to $ 575,000. Approximately $ 200 per month more and monthly payment reflecting a $ 25,000 increase in your purchasing power. This is going to come with two things; this will result in a payment difference which will invariably be greater than the $ 550,000, and it will also depend on the region and county you are buying in, it could push you into a high balance. The loan limit is $ 548,600 for conforming loans. This means that loans of $ 548,600 or less have better interest rates and more attractive terms. Loans can be made more than that up to the maximum high balance loan limit in the area where the property is located. However, in this example, $ 575,000 would mean that you could potentially have a high balance loan.
The price of a high balance loan is different from a loan of $ 548,600. Back to our scenario, your purchasing power has increased by $ 25,000, your property taxes are going to be higher, and your total payment is approximately $ 200 more per month. It can also mean that you have to deposit more than the FHA of 3.5%, as the FHA only goes up to a certain loan limit in the area in which you are buying. This means 1 of 2 results; you have the extra money in your budget, so your payment is correct, and you are fine even if the ratios are a bit high, because the FHA has flexibility in the debt-to-income ratio. Or it means that you may need to put in more money to meet the loan limit so that you have a payment that will help you qualify more easily. It can also mean the possibility of having to mine your 401k or getting a gift from the family.
The moral of the story is this; if you are pre-approved for a certain amount, stick to that amount. If you need to change loan programs or change the scenario, let the lender do it with any documentation they might need. They might need a co-signer; they might need proof that the debt is being paid off, which would allow you to buy more home. Or they might need documentation of the additional increases you just got. Either way, trust your lender. Especially if you are at your maximum purchasing power, everything becomes more important. The key is to be pre-approved, to enter into a contract and to take out that loan. Ongoing communication with the lender and sometimes having to do things that can be uncomfortable, like asking family for help with the down payment or using the 401K for example. It could also mean that your real estate agent is going back to fight for you when it comes to getting cash credit for closing costs as another alternative. They are alternative. Just know the risks when pushing the limits of your maximum pre-approval amount. A good lender who has experience in helping specific families with purchases can walk you through the ins and outs of what it takes to influence your borrowing power. It might help to differentiate one neighborhood from another neighborhood.
Scott Sheldon is a local mortgage lender, with a decade of experience assisting consumers with the purchase and refinancing of primary residences, second homes and investment property. Learn more at www.sonomacountymortgages.com.