Even if you are pre-approved to purchase a home, it doesn’t mean that you are approved to buy any house. The type of property can have an impact on how much you can afford. Keep this in mind before you settle on a home. Below are some guidelines to consider when you wonder as to how much house I can afford.
Usage of Property
How you are planning to occupy your new property can affect your options for mortgage pricing. Whether you use it as a primary residence, second home, or as an investment property, your lender will verify your home’s occupancy during their underwriting process. (Remember that house’s usage depends on occupancy and not upon how many houses you currently have or how many you bought in the past.)
You must live in a home for most of the year for it to be acknowledged as a primary residence. A primary residence makes you eligible for the lowest minimum down payment (as low as 3%) since the lender sees it as the least risky.
If a house has a distance of at least 50 miles from your primary residence and you plan to live in it for at least some part of the year, it will be considered your second home. Such homes carry the same interest rates as a primary residence; however, they need a higher minimum down payment (10%).
Finally, if a house is located within 50 miles of your primary residence and you’re planning to rent it out, it will be considered as an investment property. Such houses usually have the highest minimum down payment requirements (20%) and carry the highest interest rates of all three property occupancy types.
Suggestion: Remember your home’s location can affect whether it’s seen as an investment property or not. Note that if the property is situated too close to your primary residence, you will have higher interest rates.
Type of Property
What if you are pre-approved for a single-family home, but you found a condominium that’s your perfect match? Even if the list prices for both property types are the same, that condo may not qualify due to it being more expensive. This is because they have higher interest rates and usually have HOA fees, which will be taken by your lender into your mortgage qualification. It’s also hard to find a home loan lender who is willing to work with a certain kind of property. There are also some tricky properties that do not meet the standard Fannie Mae requirements, such as manufactured mobile homes and non-warrantable condos.
Suggestion: Remember to ask your real estate agent and lender about the warrantability and HOA fees of the property, if you’re planning to buy a condo or a townhouse.
You might end up in a bidding war if you’re shopping homes in competitive areas. It can push you over your original budget and become complicated if you’re on the verge of going into a jumbo loan (a loan amount above local limits which are set by the federal government). Jumbo loans can affect your minimum down payment, required assets, and credit score you’ll need to qualify, as they have unique underwriting requirements. As lenders view Jumbo Loan amounts to be riskier, they carry higher interest rates.
Suggestion: If you’re planning to go for a jumbo loan, make sure to have a chat with your lender about the qualification requirements and pricing of the mortgage.
Tax Rates of the Property
Tax rates of properties differ from area to area as they are determined locally. Property taxes can add up substantially to your monthly payments, as they might be very high in some locations. Remember as tax rates usually fluctuate over time, those expenses could rise in the future.
Suggestion: It’s a good thing to look into current and historical trends of taxes in advance. By doing that, you will spend your time and energy on locations and properties that fit into your budget.
Discounts on Local Mortgage
Discounts do exist, but they are dependant upon your property’s location and your financial statistics. Discount offers are often fixed block-by-block, and a particular property can have a lower minimum down payment or lower interest rates in comparison to similar homes.
Homeowners Association (HOA) Fees
Many condo communities and townhouses require HOA fees. Amount collected as fees is spent on the maintenance and improvements of the properties in the association. It can become a substantial expense over time, often several hundred dollars every month. HOA fees are factored into your debt-to-income ratio. This can affect your ability to qualify for a mortgage.
Suggestion: Explore the areas you’re shopping in, whether HOA fees are common there. If yes, then talk to your lender about how these fees can affect your eligibility for the mortgage. Moreover, try to add these HOA fees to your monthly budget and adjust your price range accordingly.
Maintenance and Utilities
If the home you’re buying has either a pool or yard, it will increase your maintenance expenses. You might need to adjust your monthly budget accordingly for it.
Suggestion: Estimate the total yearly cost of this expense and divide it over the year to get the expected monthly expense. Start saving money every month in a separate account, so that you’re prepared when those expenses eventually arise.
If you need help in calculating whether you can afford a specific property, call our loan experts at Texas Trust Loans to get the proper information and guidance.