Loan Limits Are Increasing — But Don’t Go Crazy

The Federal Housing Finance Agency announced late last month that conforming loan limits will jump in 2020, hitting just over $510,000. That’s up nearly $100K in the last four years.

What’s more? The Department of Veterans Affairs is eliminating limits all together on its VA loans.

Of course, this is good news for up-and-coming homebuyers. It means more home buying power and the chance to expand your budget when looking for that dream home. For buyers in higher-cost housing markets, this can be extremely helpful.

But these increased limits also come with increased risk. Just because you can borrow $510K doesn’t mean you should. In fact, doing so might be downright bad for your finances.

Are you thinking of buying a house in the New Year? Here’s why maxing out those new loan limits may not be smart.

Spend only what you can

As that old saying goes, “less is more,” and when it comes to a mortgage — one that impacts your household expenses for decades to come — that’s certainly true.

While loan limits are now topping out at $510,000 (higher in some markets), that doesn’t mean you should go spending that much on a house — even if you can qualify for a loan of that size. No matter what the limits are, taking out a mortgage should still be a careful numbers game, one that takes your income, debts, and even your future plans into account. 

Getting pre-approved for your mortgage loan is a start, but don’t take your pre-approval letter as gospel. You might be approved for a $450,000 loan, but to determine if you can really afford the payment that comes with it, you need to know:

• What your monthly income is (and where you expect it to be years down the line)
• Your monthly debts, and how much of your income they take up
• The costs of maintaining your home and yard, and paying your monthly bills
• Other household costs you have (childcare, fuel, groceries)

You can use a mortgage calculator to get an estimate of what your monthly payment will look like. Then weigh that against the above information, and make sure you have the financial resources to comfortably cover the payment — plus other expenses — month after month, year after year. 

More than just a mortgage payment

It’s also important to remember that your mortgage payment is only one small part of the equation. It’s a big one, of course, but there are also many other expenses you’ll deal with both during your home purchase and once you’re in the house.

As a homeowner, you’ll also have these added costs to deal with: 

• Your down payment 
• Closing costs
• Maintenance and repairs
• Utilities (and initial utility deposits)
• Property taxes
• Homeowners insurance
• Furniture and decor
• Lawn care
• HOA dues

Make sure you build in a financial cushion to cover these costs. Having some savings on hand can also help, as there may be times when utility bills are higher than expected or there are unforeseen repairs to be made.

Don’t become house poor

Spending too much on a home can leave you what’s called “house poor.” It means a huge chunk of your income goes toward your house, leaving little left over for anything else. Essentially, it says you’ve put all your eggs in one basket (your home). 

Being house poor is dangerous for several reasons:

1. Any change in income, employment, or your health could make it impossible to make your payments. You could face foreclosure if you don’t catch up.
2. You might have trouble paying other bills. Falling behind on these could hurt your credit and force you into bankruptcy.
3. It means less financial freedom. You won’t have any flexibility in what expenses you can take on — be they emergency medical bills or just a much-needed family vacation.

They can also cause serious stress and anxiety, and in some cases, even marital problems. (Money is one the leading causes of divorce in the U.S.)

Make sure you’re ready

Aside from choosing an appropriately priced properly and getting a mortgage payment you can afford, it’s also important to time your home purchase right. 

Before buying a home, you should have consistent, regular income, solid credit (you’ll potentially pay a lot more in interest without it), and the time and resources to care for the property and ensure it’s future value. Having a decent amount of cash for a down payment is important, too, as this will help reduce your monthly payment and, in some cases, eliminate the need for costly mortgage insurance. It might help lower your interest rate as well.

Can you afford to buy a house?

Are you considering a home purchase? Want to learn more about what you can afford or gauge your future mortgage payments? We can help. Get in touch with an Embrace Home Loans expert today to talk details.