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Thinking of buying? Terms trump price.

By
Industry Observer

If you're planning to buy your first home, you're probably wondering how much home you can afford.  It may surprise you that a lender doesn't have much concern for the price of the home you choose.  As long as the appraiser thinks the home is worth the selling price, the lender will be satisfied.

When you are ready to make a buying decision, you will first need to ask a lender to give an indication of your ability to secure financing.  You will request a pre-approval to finance a home purchase.   You will be asked to submit certain information about your employment, income, and expenses, along with authorization for the lender to check your credit.

After successful verification of data, the lender will tell you that you will be able to buy a home.  How much can you pay for the home?  It depends on the terms of the sale and financing.  The lender will tell you what size payment they will allow you to make, and you will use that information to determine the highest sale price you can afford.  If interest rates change, the target price of the home will change.  For example, if the lender says your maximum payment is $1,000 and current interest rates are 5.5%, you will be able to borrow $179,000 for your new home.  If rates go down to 4.5%, you will be able borrow about $197,000.  If they go up to 6.5%, you will be able to borrow about $158,000.  That's a pretty wide range, and it illustrates how changing interest rates can change your price range.

So, what is the target price for your new home?  It depends on the terms.  Interest rates can change rapidly, as they have done in the last few weeks.  Unlike the price of houses, interest rates are almost impossible to negotiate.  With rates trending upward, it's probably better to act sooner than later if you're thinking about buying.

Call me to arrange a no obligation (honest) home buyer orientation and strategy session in my Eagan office.  Even if you are locked into a lease and can't move until May or June, it's not too early to begin formally planning.  Call me now.

Posted by

 Mike Carlier  Lakeville, MN

 

612-916-3033

 

Jenny Durling
L.A. Property Solutions - Los Angeles, CA
For Los Angeles real estate help 213-215-4758

When I read the title, I expected the post to be about terms such as length of escrow and inspection periods rather than interest rates. You are right on with what you say.

Dec 19, 2010 06:03 AM
Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

Jenny, yes it's a bit ambiguous.  I think sellers think of terms only as terms of the purchase agreemant, whereas the buyer has two sets of terms of concern.  Of course, the right terms can make a $10 million dollar home affordable to everyone -- ten bucks a month for a million months with 0% interest, I'd buy in a heartbeat.

Dec 19, 2010 06:24 AM
Mike Saunders
Retired - Athens, GA

E.J. - I am with Jenny on this, I was expecting it to be contract terms, but yes, the terms of the loan dictated the maximum price of the home that can be purchased.

Dec 19, 2010 07:21 AM
Kathleen Lordbock
Keller Williams Realty Professionals - Baxter, MN
Keller Williams Realty Professionals

A small change in the interest rate can make a big change in what you are able to buy!

Dec 20, 2010 02:34 AM