A necessary exercise for first-time home buyers and interesting for existing homeowners thinking about upsizing.
Financing is the primary question: How large of a loan do you qualify for? Knowing this, you add-in the down payment amount, optimize between the two and you have a purchase price.
The loan amount depends on three key factors: your gross monthly income, your credit score and current interest rates.
Monthly Mortgage Amount
Lenders (and you) want to minimize the risk of you not being able to make your monthly mortgage payments.
The FHA says that total debt payments are not to exceed 43% of gross monthly income (before withholdings). This “debt-to-income” ratio (DTI) includes all debt commitments: mortgage payment, property taxes, HOA fees and other loans, such as auto and student loans and credit cards. Many buyers and financial advisors like to keep this closer to 35%.
For example: $12,000/mo income * 40% DTI = $4,800 /mo total debt payment. Reduce this by existing monthly debt payments and this is your monthly mortgage payment limit.
Your credit score affects the interest rate. The rates quoted on the Wells Fargo website use “Excellent” for 760+ and “Good” for 700-759. There is an eighth of a point difference in these two rates, so not a huge impact. More of an issue as you drop below 700.
Good idea to review your own credit score and report, while you can resolve any issues that may be sticking points with underwriters in the future. Something you should do now (a good winter-day project).
Interest rates are unbelievably low right now. The national average for a 30-year fixed loan is 2.75% (blue line). Wells Fargo says 3.0% for a jumbo loan with good credit in Santa Clara County. Rates vary daily by lender, how much you pay in points (up-front payment) and if you have an account with them.
Use an online mortgage calculator to calculate the loan amount that fits with the monthly payment you can afford. Google has a quick and easy calculator with a “Maximum loan” tab that calculates the loan amount.
Affordable Purchase Price
The chart below puts this all together for four different levels of income. Loan amounts increase with lower rates and decline with higher interest rates. Larger down payments increase the purchase price.
Consult with a mortgage advisor to have them “run-the-numbers” to get a proper answer. This is usually a no-charge service and can be completed within a day or two.
Affordable AreasA map of recent home sales in your price range gives you an idea of potential areas with affordable homes.
Below is a map of recent single family home sales with a final sales price in the $1.0M to $1.5M price range in the Silicon Valley area. I can quickly provide you one for your price range.
Keep in mind desirable homes that sell within the first week or two will typically sell for 3-5% over list. Listings that have been on the market for 3+ weeks may be considering reducing their list price by 3-5%.
My website www.SiliconValleyMLS.com provides a breakdown of home prices by the 12 cities over the past year. Another great tool to help find areas with affordable homes.
I am more than happy to “run-the-numbers” with you, discuss the options and answer any questions.
Send me an email me at email@example.com and let’s get started.
Associate Broker, MBA
Compass DRE 01877044