So, you’re looking to purchase a house, you’re preapproved, and you’re on the home search. You and your realtor are going out on nights and weekends looking at homes and deciding if the house is the right fit for you and your family.
Here’s some information you should be aware of as it relates to your preapproval amount and what you should spend on a house…
When you’re purchasing a house, the number one most important thing is the mortgage payment. Affordability drives your ability to spend money. If the house is not affordable you won’t purchase it, it’s quite honestly that simple at the end of the day. The perfect situation is to be able to purchase a house where your payment, cash flow, and financial budgetary concerns on a monthly basis are met inclusive of the mortgage payment. When we talk about a mortgage payment, we’re talking about principal interest, taxes, and insurance and any monthly applicable private mortgage insurance as the total monthly mortgage payment.
Though purchase price of the house is important, what you’re never going to see after you close on the house is the purchase price. The mortgage payment is what you’re going to see month in and month out over the next 360 months assuming a 30-year fixed rate mortgage. Here is where the rubber meets the road as it relates to you being preapproved and getting into contract on the house. Let’s say you’re preapproved for $550,000 with an FHA insured mortgage. The lender has conveyed to you this is really your max spending power based on your payment and debt to income ratio. Let’s say after a few failed attempts at making offers at this price range on the advice of your realtor on a whim you decide to make an offer for up to $575,000. $200 a month approximately more and monthly payment reflective of a $25,000 increase in your purchasing power. This is going to come with two things; it’s going to come with a payment difference which is going to be invariably higher than the $550,000, and it’s also depending on the area and the county in which you’re purchasing it could move you into a high balance. The loan limit is $548,600 for conforming loans. This means loans $548,600 or lower have better interest rates and more attractive terms. Loans can be done more than this all the way to the maximum high balance loan limit in the area which the property is located. However, in this example, $575,000 would mean that you potentially could be having a high balance loan.
A high balance loan is priced differently than a loan that is $548,600. Back to our scenario, your purchasing power has increased $25,000, your real estate taxes are going to be higher, and your total payment is about $200 a month more. It also might mean you’re having to put down more than the FHA 3.5 percent down because the FHA only goes up to a certain loan limit in the area in which you’re purchasing. This means 1 of 2 outcomes; you have the additional cash in your budget, so your payment is fine, and all is well even if the ratios are pushed a little bit as FHA does have flexibility in the debt-to-income ratio. Or it means that you may have to put more money down in order to get to the loan limit in order to have a payment that’s going to help you qualify more easily. It also might mean the possibility of having to tap your 401k or get a gift from family.
The moral of the story is this; if you’re preapproved for a certain amount, stick with that amount. If you must change loan programs, or make a change to the scenario, let the lender do it with the documentation that they might need. They might need a cosigner; they might need evidence that the debt is paid off which would allow you to purchase more house. Or they might need documentation of the additional raises that you just happened to be getting. Whatever the case is trust your lender. Especially if you’re at your max spending power, it all becomes more important. The key is in being preapproved, getting into contract, and closing on that loan. Ongoing communication with the lender and sometimes having to do things that may be uncomfortable like asking family for help with the down payment or tapping the 401K for example. It also might mean having your real estate agent go back to fight for you as it relates to getting the silver credit for closing costs as another alternative. They are alternative. Just know the risks when you push the envelope on your maximum preapproval amount. A good lender who has experience in specifically helping families with purchases can walk you through the ins and outs of what it might take to influence your borrowing power. This could help make the difference from one neighborhood versus another neighborhood.
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.