Home Buyer on the Fence? How Waiting Can Hurt Borrowing Power
Is buying a home still a real possibility for younger adults? Let’s look at a realistic example scenario:
A young homebuyer makes about $85,000 each year. Assuming solid credit—and other monthly liabilities, like car payments and student loans (limited to $600/month) and taxes, homeowners insurance and mortgage insurance on the new home (about $700/month)—that prospective homebuyer could possibly qualify for about $352,000.
With monthly PITI just under $1,950 on a 30-year fixed rate mortgage at 4.5%, a new home is a reality in many markets.
Maybe $85K is above the median income in many areas—and maybe the other debt and taxes and insurance estimates are low. However, those numbers are just there for example purposes.
With home prices increasing due to demand and lack of inventory—especially with existing homes—the likely increases in mortgage interest rates that appear to be looming for 2018 will have a significant impact on what that young home buyer may qualify for as the year goes on.
More importantly, do increasing home prices—and even a modest increase in mortgage interest rates—take those millennial buyers out of the market?
⇒ If rates go up by 1/8th to 4.625%, that example buyer loses about $5,000 in buying power.
⇒ At 4.75% they would qualify for about $342,000 instead of the original $352,000.
⇒ If rates get to 4.875%, the loan amount drops to $337,000.
⇒ At 5%, that same potential homebuyer would qualify for a maximum loan amount of about $332,000.
That half of a percent increase in the interest rate reduced that potential homebuyer’s purchasing power by about $20,000. That is significant—and 20,000 reasons to get potential homebuyers into the market, looking at homes, making offers, and rate locked ASAP.
If you have potential homebuyers on the fence, maybe waiting for spring or just waiting for whatever reason, we would be happy to review their current options and talk to them about what waiting might do to their ability to get financed for the home they want. With Embrace’s product line, our Approved to Move™ fully underwritten pre-approval program, and our Guaranteed On-Time Closing offer, there is no reason we can’t have them in homes right now.