Since homebuyers want to purchase their new house at the lowest possible price and sellers want to sell that house at the highest possible price, usually it’s either a buyers’ market or a sellers’ market. Right now, however, it is both. How? Rock-bottom interest rates.
Because interest rates are so ridiculously low right now, buyers can afford properties at a higher purchase prices, which in turn, benefits sellers. When people buy a house, they take on the cost of monthly mortgage payments plus other costs such as taxes, insurance, and maintenance that add up to an additional 3 percent of the purchase price over the course of the year. Today, interest rates are about a percent lower than they were a year ago. Last year, the average monthly cost of home ownership on a $400,000 property would have been $2850; this year it is only $2580—that’s a 10.5 percent drop.
If it’s good for buyers and sellers, you might be wondering who this market is bad for: it’s the lenders. They are basically subsidizing the housing market right now. Even though home prices are up about 10 percent from last year at this time, just a 1 percent drop in interest rates makes that house cheaper to buy today than it was a year ago.
If, like most people, you’ll need a home loan to purchase a house, a good rule of thumb to determine the most expensive house you can afford is for your monthly mortgage payment to be at or below 40 percent of your gross income (including taxes, insurance and maintenance).
So, to purchase a $400,000 house now, you’d need a combined household income of about $65,000; whereas, if rates were a percent higher, you’d need a combined household income of closer to $72,000. Let me break this down: if you and your partner or spouse work full-time and make about $20 per hour each, you can afford a mortgage payment on a $400,000 home. Keep in mind, income is not the only financial consideration when qualifying for a home loan. If you’re curious about what you can afford, make an appointment with your Realtor to review the details of your particular financial situation and they can refer you to a local loan agent.
There are basically two levels of loan qualification. You can be pre-qualified or pre-approved. To get pre-qualified, all you have to do is sit down with your loan agent and do some simple calculations based on your income, how much debt you carry, and whether you have any savings you can use for a down payment and closing costs. Being pre-qualified is much better than not being pre-qualified, but it’s not as good as being pre-approved.
To become pre-approved for a loan is more involved, but it is an excellent way to increase the chances of getting the property you want. Becoming pre-approved means working with a loan agent who will review all your assets, liabilities, tax returns, W-2s, credit history, and any other relevant financial information to begin the process of applying for a loan. The loan agent will also run a credit check, verify employment, and make sure you have documentation proving you have enough cash for the down payment. The main difference between being pre-approved for a loan and applying for one is that when you’re pre-approved, you simply haven’t found the property you want to buy. The only remaining step to secure the loan is the appraisal.
When you’re pre-approved, sellers are far more likely to accept your offer as opposed to one from a potential buyer who cannot prove they can afford the property in question.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. To see previous articles, visit www.selzerrealty.com and click on “How’s the Market”.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.