As mortgage rates and home prices rise, homeownership in Santa Cruz County will become even more difficult to achieve. The maximum loan amount that a homebuyer can qualify for is based on two key factors: income and current monthly debt obligations. The mortgage industry will allow a borrower to spend up to 45-50 percent (depending a loan program) of their gross monthly income on their combined monthly debts, which include the monthly PITI (Principal, Interest, Taxes, Insurance) on the home they are buying plus other long term debts such as car payments, student loan payments, monthly credit card obligations, spousal and/or child support, etc. For example, if a borrower is allowed to spend $4,000 per month on their combined debts and they have $1,000 per month in current long term obligations, he or she will only be able to spend $3,000 per month on their home’s PITI.
Although rates are still near historic lows, mortgage rates have risen just a bit since they bottomed out over the past few years but there are predictions that they could reach 5 percent by next year. A principal and interest payment of $2300 per month at 4 percent will pay for a loan of $481,000; however, at an interest rate of 5 percent, that $2300 payment will only pay for a loan of $428,000. Needless to say, as interest rates rise, borrowers on a fixed income will experience a reduction in purchasing power and may not be able to qualify for as large of a loan as they would like.
While mortgage rates are based on a myriad of factors, a borrower has some control over their final mortgage rate. Assuming good credit and a down payment of 20 percent or more, perhaps the biggest factor affecting a borrower’s mortgage rate is the amount of loan origination fee that a borrower chooses to pay. For example, if the difference between obtaining a 30 year fixed interest rate of 4.5 percent and 4.0 percent is two points in the loan origination fee, the two point loan origination fee will cost $8,000 on a $400,000 mortgage. This is where the seller can help. Check with your Realtor, but perhaps the best time to ask for a credit from the seller is at the time the initial offer is made.
In order to help sell their home, a seller may be willing to help the buyer cover some of the buyer’s closing costs. While sellers may not be so willing to reduce their sales price of their home, they may be willing to help the buyer pay some of the closing costs. This will allow a buyer to qualify for a larger loan amount than otherwise may be possible, which in turn will allow the seller’s home to be exposed to more potential buyers.
It should be noted that the mortgage industry allows a seller to pay for all or a portion of the buyer’s closing costs but guidelines will not allow the seller to give the buyer money for future repairs, inspections or remodeling.