How Much House Can I Really Afford?
While I prefer to leave the home affordability up to loan officers, I think there are a few points that need to be made to help you understand how much house you can afford when you speak to a loan officer.
Not Every Home Buyer is the Same.
Let me give you an example. Bob and Joe both work at Abbott, and both make $50,000 a year. Recently Bob got pre-approved to buy a home for 225,000. Joe heard the news, and went in to get pre-approved as well, but Joe only got pre-approved for $160,000. How is this possible? Shouldn’t they have been able to afford the same amount to buy a house?
The honest answer is No – not necessarily. You see, while both of them make the same amount of money, they do have different debt amount. Bob drives a mini-van to work that he makes a small car payment for. Joe drives a 5 Series BMW whose payment is substantially higher. Bob has 1000 in credit card debt, and Joe has 8000.
Bob makes his payments on time, and has Excellent credit scores. Joe on the other hand is always making his payments a late, and as a result has a below average credit score. When applying for a loan, the risk to lender is higher with Joe, so they needed to charge a higher interest rate to offer a loan, and that reduced Joe’s buying power.
These are just a few examples on what makes Bob and Joe different is how much house they can afford even though they make the same money, and work for the same company. The difference is then in their spending and payment habits. This is why it is so important for home buyers to speak to a qualified loan officer to determine how much house can you afford.
Remember, when buying a house that is being financed. It is not you or I who decide what you you can afford to pay – it is the bank who is lending the money. They are not deciding what payment they think you can make, they are deciding how much they are willing to let you borrow.
Not Every Bank is the Same
Each bank has different guidelines to asses home buyer risk. Bank of America may be different than Wells Fargo and different from Chase. When applying for a home loan it is important that you try and get approval from different banks to measure how much you can really afford.
So why are banks different? Each bank sells your loan to a list of investors. It is actually their investors who determine the risk and guidelines. So investors who have higher risk tolerance may offer you better interest rates that in turn lower your payment, and increase your purchasing power.
Our recommendation when buying a home is to go through a mortgage broker. Mortgage brokers and loan officers have an advantage over large banks. They are able to cross shop loans to make sure you are getting the best terms available. Bank of America loan officer can usually only offer you a BofA Loan. While a mortgage broker may be able to offer you BofA, Wells Fargo and Chase loan all with one application.
Not Every House is the Same
So you talked to the banks, they have come back to you and said that you qualify for a home at a maximum purchase price of $ 200,000. Great! That means you can afford to buy any house out there at $200,000 and below right? Not exactly. In most cases YES, but not Always.
How is that possible? How can you afford one house at $200,000 , and not another at $200,000. Well, here is where having a Realtor comes in handy. You see some houses are in Mello Roos areas. Mello Roos are taxes on new communities to help pay for the roads, sewers, water lines, parks, street lights and the necessities to make a community.
The Mello Roos taxes will vary from home to home even within the same community. The higher the Mello-Roos tax the lower your purchasing power. Why is that? Because the bank determines how much you can afford based on the total debt payment. So higher taxes mean higher debt.
Mello Roos Taxes are 20, 30 or 40 year bonds, so a home that is fairly new can expect to have some sort of Mello Roos taxes associated with it.
The other thing to consider is if your future home will be in a Planned Unit Development or community governed by a Homeowners association. Homeowners associations usually have monthly fees that have to be account for in calculating your monthly debt payment.
Like the Mello Roos, the higher the HOA payment the lower your purchasing power.
It is important that you get pre-approved to determine how much house you can afford to start, and then when you find a house, make sure the house and proposed purchase price are within acceptable loan limits. You can start to search for homes here
A good Realtor that works closely with your loan officer will make sure that before you ever got out to see the house that it is within your loan limits – even with mello roos and hoa fees. This way if you fall in love with the house, you know that you can afford to buy it.