To purchase a home, most folks get a conventional loan, either a conforming loan that stays under the limit set by federal guarantors Fannie Mae and Freddie Mac, or a jumbo loan that goes over that limit and costs a little more as a result.
Until Nov. 1, 2021, the Mendocino County loan limit for conforming loans was $548,250. However, the limit just skyrocketed to $647,200 based on the sale prices of owner-occupied, single-family homes in our area.
What does this mean? It means more people may be able to buy homes in the $700,000 to $800,000 range. Before Nov. 1, borrowers with a 20 percent down payment were capped at $685,000 (making the loan amount $548,250). With the new loan limit, borrowers with a 20 percent down payment can now purchase a home for $809,000. Be warned: just because you can do something doesn’t mean you should.
The new loan limits are based on rising home prices, not rising income. So the question becomes: how much income do you need to qualify for this bigger loan? If you are an absolutely perfect borrower with no blemishes on your record, no debt of any kind, and solid, verifiable household income, you could conceivably qualify for a debt-to income ratio of 49 percent. If the loan amount is the new loan limit of $647,200 and the interest rate is, say, 4 percent (which is arbitrary, since I am not allowed to quote current rates), your monthly loan payment would be $3,089. On top of that, you’d pay approximately $810 per month in property taxes and about $200 per month for homeowners insurance, with a total of principal, interest, tax, and insurance (PITI) payment of $4,100 per month.
If you use these numbers and you are a perfect borrower buying a house in perfect condition, you could qualify for this home with a household income of $8,400 per month or just over $100,000 per year. Could you do this? Yes. Do I recommend it? No. Not many people are going to be happy spending half of their income on a house payment, especially when you consider that home ownership comes with more expenses than just the monthly PITI. I typically recommend that home buyers budget about 3 percent of the purchase price for annual upkeep and maintenance, because at some point roofs need replacing, siding needs painting, water heaters need updating, and dishwashers need repairing, not to mention the kid next door with his trusty baseball bat and poor aim. On an $809,000 home, you should budget about $2,000 per month for repair and maintenance.
This is why I like to see people keep their loan payment to a maximum of 35 percent of their income. If you were going to max out at the conforming loan limit with $4,100 payment, I’d say your monthly household income should be at least $11,500 per month or something in the neighborhood of $140,000 per year.
If you are looking for a local loan officer, which is the way to go, may I suggest calling Ginny Richards at Kind Lending. Not only did she provide the details on the loan limits for this article, she really knows her stuff and often goes the extra miles for her clients.
If you have questions about real estate or property management, please contact me at email@example.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.