If you were offered the chance to buy dollars for $0.70 a piece, how many would you buy? When you compare today's home loan rates to the average in effect for the last 10 years, that is approximately what you are paying. And given lower home prices, there has never been a better opportunity to buy a home than today.
This month, YOU Magazine turns to contributing editor and national mortgage expert Jim Sahnger to learn why buying now is still a great decision and what you need to look at in your market to gain confidence. Sahnger will also share with you a new potential pitfall to the mortgage process to prevent your mortgage application from blowing up just prior to closing.
Home Affordability: The Key to Your Market
When people decide to buy a home, the monthly payment is a crucial factor. Affordability is a function of home price, interest rate and down payment.
Conservative underwriting for mortgage payments state that borrowers should allocate no more than approximately 30% of their income for a house payment. Looked at from another perspective, this means if your monthly income is $4,000, you should keep your mortgage payment under $1,200 a month.
You also want to keep in mind that your total monthly debt payments should not exceed 41% of your income. While exceptions will sometimes allow you to exceed that number, you don't want to be stressed out, feel like you're married to your home or miss out on opportunities for investments in a 401K or retirement account.
That said, many experts have said that when median home prices exceed median incomes by three times in a market, then that market could be viewed as a high cost market. As an example, median household income in the U.S. is approximately $51,233 and the median home price in the U.S., according to the most recent statistics released from the National Association of Realtors, is $173,100.
Based on this one statistic, it could be reasoned that housing overall may be somewhat unaffordable. However, you also have to take into consideration what the monthly payment would be based on existing interest rates.
Assuming a homebuyer puts 10% down on a median home price, the monthly payment, assuming the cost of property taxes and insurance at 1% and .5% respectively, would be 28.9% of income, well within reason.
Another consideration should be the cost of renting a home when compared to a house payment for the same type of home. When the cost to rent is similar to the monthly cost to own or more, housing may well be affordable for that particular market.
Sahnger offered this comparison for homes in an area where he works. "When preparing to speak at a housing rally in South Florida, I went online to look at what types of homes were on Craigslist for $1,000 a month to rent. I found one home that offered 1,300 square feet, no garage and no pool where a home with a similar mortgage payment offered nearly 2,000 square feet of living area, a pool and two car garage in a nicer area." This is certainly one example where the cost to own is less than the cost to rent.
One other factor Sahnger mentions is that when the tax deductible portion of the payment is taken into consideration, the after tax mortgage payment was approximately 15% less, making the cost to own even more affordable when compared to renting.
Credit Reports: When One May Not Be Enough
Effective June 1, Fannie Mae has instructed lenders that they should adopt a new policy that could involve a second review of an applicant's credit report just prior to closing. When reviewing defaulted loan files, they have determined that the credit profile of a borrower may have changed from the time of the initial review of the credit report and at the time of closing.
The potential impact to a borrower who has utilized credit to make significant purchases after the initial credit report could include a delay in closing, increase of closing costs and/or interest rate or a decreased loan amount. In the worst case scenario, it could even result in a loan being denied, even after an original approval had been granted.
In order to eliminate any possibility of potential problems before closing, anyone in the application process should use credit sparingly and make sure they adhere to the tips provided below by credit expert, Linda Ferrari of Credit Resource Corp. For more tips on what you should not do regarding credit during the mortgage application process, contact the professional who supplied you with this month's issue of YOU Magazine.
Top 5 Tips for Preserving Your Credit and Mortgage Application
This list is not comprehensive but does give you a peek into situations that could create issues and could also be contrary to some ideas you have read previously.
Great Opportunities When Offered Should Be Acted Upon
The one key component in home affordability that is at greatest risk today is interest rates. Many experts have stated that interest rates should be higher than their current levels, in some cases a lot higher.
One point to remember is that every 1% increase in interest rates decreases the buying power of an individual by 10% in home price. This means that if you qualify for a home priced at $200,000 today and interest rates increase 1%, the amount you could qualify for would be reduced to approximately $180,000 to maintain the same payment.
If you could benefit from moving to a new home, don't let this opportunity pass you by. Home prices are increasing in most markets and combined with the risk of increasing interest rates, your time to get the home you want could pass you by.
For those people who haven't refinanced in the last 18 months, calling your mortgage professional could provide you with the opportunity to either cut your mortgage payment or save a lot of money by reducing the term of your mortgage to a 15 or 20 year fixed rate.
Call the professional who supplied you with this month's issue of YOU Magazine to determine what the best path is for you. The money you may save could help fund anything from a vacation to a college plan to your retirement.
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