It is no surprise that interest rates are on the rise. As interest rates rise, home spending power, i.e., buying power, diminishes. If the same loan amount and the same purchase price now costs more per month, that can start to wane on your debt-to-income ratio, which could prove to be problematic with your mortgage application.
Here are five guaranteed ways that will increase your spending power regardless of what interest rates do:
• Pay off debt. This could mean pulling money from the down payment and paying off consumer debt. Yes, that means consumer debt that even has low rates. You want to pay off the consumer debt that has the lowest balances and the highest payment regardless of those interest rates on those consumer loans. This will improve your spending power and will help support a healthy family budget.
• You are in a situation where your income is not there, but you can still afford the payment based on whatever type of income you receive or get a cosigner. This means stomaching the discomfort and asking mom, dad, or a friend for help. Having someone else cosign on your mortgage will increase your borrowing power. It really can be a tremendous financial advantage. Then when you get your financial house in order you can always refinance that person off the mortgage.
• Change mortgage loan programs. This means going form a conventional mortgage that has a max debt to income ratio of 50 percent on an FHA mortgage. Loans can get approve a debt-to-income ratio as high as 56.99 percent. That 6.99 percent differential in debt-to-income ratio can mean the difference between getting the mortgage and not getting the mortgage, buying in one neighborhood versus buying in another neighborhood. It is important particularly as it relates to spending power. Lenders look at your debt-to-income ratio as the holy grail of your ability to qualify.
• Look for houses that are more within your means. Just because you can qualify for a $600,000 house does not necessarily mean that you should buy it. If qualifying for a $600,000 house means that you are going to have to rob Peter to pay Paul each month then pull back and do not do it. It is not worth being married to your mortgage and living at the poverty line just to be able to buy a house in hopes of future financial success. Life has a funny way of working out sometimes and that is too close to the red in this example. A better approach might be to buy something such as a condominium that has a low homeowners association payment and buy the starter home instead of going all out right out of the gate living it for a couple of years and then trade up as your income equity and finances of time that that is a proven and smart strategy.
• Getting a gift from mom or dad or any other person in your life can help bridge the gap between where you are now, and where you’re going. For example, if you have money for the down payment but you don’t have enough money for closing costs this is something that can be problematic as when you purchase a house you must have enough money for both down payment and closing costs.
No matter what you see hear or read, these five proven ways absolutely are lending pillars which can help catapult you into buying a home not only that you can afford but also makes financial sense while at the same time still allowing you the ability to save money monthly.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.