Determining Your Homebuying Budget

If you are planning on applying for a mortgage in the near future, you may be wondering how the bank determines how much money to lend you. Following are some of the different parameters lenders use, although each lender has access to different loan programs and may use other metrics to measure how much of a mortgage you can afford.

Housing Expense Ratio

A guideline for reverse-engineering how much of a payment a buyer can handle is by looking at their total gross income per month and allocating 28% of that income maximum to be spent on housing expenses. Therefore, if a person’s total gross income per month was $5,000, the lender would indicate that up to $1,400 per month could be allocated to housing. Note, some lenders allow for a greater housing percentage – up to 33%.

Housing expenses include mortgage payment, hazard insurance, property taxes, private mortgage insurance (if you have less than 20% down payment) and even homeowner or condo association expenses. These are variable per property, so although the lender may have an idea of what you can afford by looking at your income, final approval would be to look at how those total housing expenses of the unique property come together.

Total Expense Ratio

Lenders don’t want borrowers to be spread too thin, so they typically also look at a borrower’s total expenses in terms of monthly obligations. These include things such as car payments, credit card payments, student loans, and other installment payments. Some lenders cap housing and other debt that requires a monthly payment at 36% (although some lenders will allow up to 43%).

Bringing it Together

How does the above come together? Using the more conservative numbers of 28% for housing expenses and 36% total of all expenses combined, here are three annual salary examples:

Annual Salary $25,000 $50,000 $75,000 $100,000
Monthly Salary $2,083.33 $4,166.67 $6,250.00 $8,333.33
28% max housing allowance $583.33 $1,166.67 $1,750.00 $2,333.33
36% max all monthly payment debt including housing $750.00 $1,500.00 $2,250.00 $3,000.00

 

Some other things to keep in mind

Your credit score will also determine if you can borrow, how much you can borrow, or the interest rate you are charged. Other parameters such as the type of loan, the type of property, the term of the loan and more can affect the interest rate as well as the corresponding monthly payment which can change the ratios.

How should you prepare for your next loan? Step one is to meet with a lender who can analyze your situation and have you make any tweaks to get your ratios in a better position. That might mean paying off a car loan or a using funds to pay off a credit card. But these ratios are carefully calculated, so meet with a lender first. You don’t want to pay off a credit card and learn that you really should have used that money for the down payment instead.

Ready to meet with a lender? Reach out! I have several that I can refer you to.

 

SOURCES:

Top Notch Negotiation Skills Needed

 

When you think of the type of negotiator you want in your corner for your next transaction, although you probably prefer someone strong to work hard on your behalf, did you know that a negotiator that is too strong, doesn’t take the time to learn about the needs of both sides, and puts up walls instead of finding common ground can do you more harm than good? When in a real estate transaction, your real estate agent will serve as your negotiator.

As a real estate agent who has been a part of dozens, if not hundreds, of negotiations, I have identified the top strong negotiator traits that are needed to get the job done:

Establish a Collaborative Environment –The number one skill of being a good negotiator is to make friends with the other side and seek “win/win” solutions. By watching out for not only your needs but the needs of the other side, the negotiator will build bridges and find solutions instead of just bellowing and trying to advance the one side’s needs by exhausting the other side.

Listening Skills – A skilled negotiator will take the time to learn about your needs and listen when you talk about why these needs are important. Of those needs, which are the most critical that you get? Once you are heard, the negotiator should learn about the needs of the other side and their biggest priorities. When both sides feel heard, they are more likely to make concessions on issues that are not as important to them.

Find Common Ground – Once the parties agree on points, a good negotiator will reiterate the common ground that has been established as that can go a long way in setting the positive environment needed to find even more common ground.

Stick to the Facts – Emotion is the enemy of a good negotiation. A strong negotiator knows how to keep emotion at a minimum so that the tough back-and-forth isn’t taken personally. By focusing on the facts at hand and by diffusing contention that comes when things get heated, it causes everyone to think a bit slower and work with cooler heads.

Strength on the Points Most Important to You – A good negotiator will know when to push, when to pause, and when to offer concessions in order to forward the cause. Just because a negotiator has a win-win philosophy doesn’t mean they can’t be strong when advocating for the points that you are most concerned about.

It’s up to you to make sure the agent you choose has strong negotiation skills.  Look for a strong track record. Make sure there is a good balance between listening and showing strength and positivity. Next steps should be made clear and the agent should listen to any concerns you have with an ear for solving those. And of course, read reviews. Past client experiences say a lot.

I have had the opportunity to negotiate many a transaction to a successful conclusion. I would be happy to share these experiences with you. Reach out! I’ll share my elements of a true “win/win” deal, based on my own experiences.

Interest Rates on the Rise – How Much Does It Matter?

In mid-June, the Federal Reserve raised interest rates. However, the interest rates the Federal Reserve raised are not mortgage rates – they are the interest rates that banks charge each other to borrow money. This cost is eventually passed on to consumers (mortgage rates are one of those ways) and that is why you should pay attention to what the Federal Reserve is doing.

At this last meeting, the rate was raised for the 7th time since 2015. The goal of the Federal Reserve increasing and decreasing the Central Bank’s interest rate is to encourage economic growth or dampen it (to decrease inflation).

Mortgage rates were already rising before this latest adjustment hit, up to 4.53% (as of 7/12/18) from 3.95% at the beginning of 2018 (according to FreddieMac.com). Experts indicate they could reach between 4.75 – 5.0% by the end of 2018.

What does this mean for people buying, ready to refinance, or who want to pull out some equity? Below is a chart that illustrates a number of purchase amounts, assuming 20% down, a variety of interest rates, and the corresponding approximate monthly payment for a 30-year fixed rate mortgage:

Home Price 20% down 4.0% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 6.00%
$250,000 $50,000 $955 $984 $1,013 $1,043 $1,074 $1,104 $1,136 $1,167 $1,199
$300,000 $60,000 $1,146 $1,181 $1,216 $1,252 $1,288 $1,325 $1,363 $1,401 $1,439
$350,000 $70,000 $1,337 $1,377 $1,419 $1,461 $1,503 $1,546 $1,590 $1,634 $1,679
$400,000 $80,000 $1,528 $1,574 $1,621 $1,669 $1,718 $1,767 $1,817 $1,867 $1,919
$450,000 $90,000 $1,719 $1,771 $1,824 $1,878 $1,933 $1,988 $2,044 $2,101 $2,158
$500,000 $100,000 $1,910 $1,968 $2,027 $2,087 $2,147 $2,209 $2,271 $2,334 $2,398
$550,000 $110,000 $2,101 $2,165 $2,229 $2,295 $2,362 $2,430 $2,498 $2,568 $2,638
$600,000 $120,000 $2,292 $2,361 $2,432 $2,504 $2,577 $2,651 $2,725 $2,801 $2,878
$650,000 $130,000 $2,483 $2,558 $2,635 $2,713 $2,791 $2,871 $2,953 $3,035 $3,118
$700,000 $140,000 $2,674 $2,755 $2,837 $2,921 $3,006 $3,092 $3,180 $3,268 $3,357
$750,000 $150,000 $2,864 $2,952 $3,040 $3,130 $3,221 $3,313 $3,407 $3,501 $3,597
$800,000 $160,000 $3,055 $3,148 $3,243 $3,339 $3,436 $3,534 $3,634 $3,735 $3,837
$900,000 $180,000 $3,437 $3,542 $3,648 $3,756 $3,865 $3,976 $4,088 $4,202 $4,317
$1,000,000 $200,000 $3,819 $3,936 $4,053 $4,173 $4,295 $4,418 $4,542 $4,669 $4,796

Remember, it isn’t just about the increase in your monthly payment. That difference is paid over the life of the loan – 360 months. So if you buy a home for $400,000 with an $80,000 down payment, your payment would have been $1,528 at 4.0%, but it is $1,718 at 5.0%. That is a difference of $68,400 over the life of the loan.

 

Question? Want more details? I am happy to provide them. Reach out!

Sources: http://www.freddiemac.com/pmms/archive.html

https://www.cnbc.com/2018/07/13/fed-emphasizes-solid-us-economic-growth-repeats-gradual-approach.html