How Much Should You Pay for Your Minneapolis House?

In this buyer’s market, you have decided that it’s time to buy a house. There are bargains out here, but many of the lower cost homes have been snapped up by others who got there first. So the question for a potential buyer still is: “How much house can I afford?”

The foreclosures of recent years resulted from many people not asking themselves this question. Up until now, most foreclosures occurred among people who overstated their income to get loans on homes they couldn’t afford or had adjustable mortgages that “adjusted “ their house payments into the stratosphere. Now, a growing number of foreclosures are among borrowers with fixed rates who have lost their jobs or found themselves unable to keep up with the mortgage.

Bottom line, the answer to the question about the right price bracket to aim for is partly about income, especially in relation to other debt you may have, but also about your lifestyle and your goals. Based on pre-approval, the bank might tell you qualify for a $400,000 loan. Based on an annual household income of about $117,000 and minimal other debts, your payment and taxes might be about $2,700 per month at an interest rate of 6%. Do you really want to pay this much for housing?

What if you have a lot of debt from a cars or credit cards acquired after you got the mortgage? What if your salary stays the same but your other expenses keep increasing? What if your partner is laid off? What if one spouse wants to stay home with the kids? Do you have resources to help you make it for awhile? Will you be able to handle increased energy costs if the home is bigger than your old residence? A mortgage you can technically afford can become a noose around your neck.

In a similar vein if you have expensive hobbies you like to pursue – golf, boating, skiing – will you really want to give these up to pay for a more costly mortgage? Will you want to close yourself off from new pursuits because you can’t afford them? If you have kids, will you have to forego better schools or tell them they can’t take dance lessons or take a class trip because your mortgage is so high? A mortgage that’s too high can affect your lifestyle.
Any discussion of how much house to buy should consider both the “what if’s” and the lifestyle trade offs you might have to make.

If you are thinking of buying a home in the Minneapolis / St. Paul area, give us a call. we can help you figure out what is affordable and then help you find a great house in line with your budget and your lifestyle. We would love to earn your business!

Tony & Lori Ashworth
952-997-8899

Stricter Loan Requirements Make It Harder to Buy Your Minneapolis/St. Paul Home

With all you read in the papers these days about the buyer’s market, the first time homebuyer’s credit, and low interest rates, it may seem like all you need to do to get a house is find one you like and wait to close! Unfortunately, it’s not that simple. Many potential borrowers are finding that getting a loan is a major hurdle.

What has happened in the fall out from the avalanche of foreclosures these past two years, is that lenders have tightened credit requirements. Many lenders have become less tolerant of flaws in a potential borrower’s history as credit became less available and have also changed the rules of the game.

Access to credit is based on the FICO score from the Fair Issac Corporation, a number derived from a calculation made based on certain factors including payment history, the amount of debt a person has, the amount of current currently available to the person, and the type of credit it is. Scores range from 350(poor) to 850 (excellent.) In times past, those who scored above 750 were likely to have access to the best loans with the lowest interest rates. Even borrowers with scores in the high 500s could get a loan, at least through FHA. Now, lenders want scores of 800 or more for the best rates; even FHA usually requires 620.

In the current environment, many borrowers are finding that their scores have dropped without any bad financial behavior on their part. Oftentimes, lenders reduce the amount of credit previously available to a person, which makes any balance consume more of the credit limit. If someone has $50,000 in open credit lines and $10,000 in debt, they are using 20% of their credit. If their lines of credit are reduced to $20,000, then they appear to be using 50% – financial “no-no.” Financial experts recommend that using no more than 30% of open credit is ideal. In past days, pushing the envelope and using more may have been okay; now this type of situation – a result of bank policy, not frivolous spending – would lower the credit score to the point where getting a loan is difficult.

If you are a homeowner who hopes to buy a home soon, this state of affairs makes it necessary for you to prepare carefully to qualify for a loan. First, it is a good idea to pull a copy of your credit report from the three bureaus, Transunion, Equfax, and Expertian before you start shopping. Your scores are likely to vary among the three, as they may report different information and use different formulas to compute your score. Current law permits you to obtain a free copy of your report each year from each bureau at AnnualCreditReport.com. These scores at least give you a ball park view of the scores a lender will review about you. If there are errors on the reports, you have time to fix them.

Next, you should get pre-approval from one or more lenders to ascertain that you can get a mortgage. The lenders will check your credit and employment, and approve you for a loan up to a certain dollar value, assuming the property you chose appraises at the purchase price, there are no title issues, and your financial situation has not changed. Because lenders have different underwriting policies, you may be offered different loan maximums and different rates at different banks. When you go shopping for a home, you need to shop for homes in the price range the bank says you can afford for the bank to be willing to actually make the loan.

Finally, once you have the house under contract, you need to be careful in the time before closing to not disturb your debt-credit ratio. If you buy a car or new furniture, the bank could refuse to issue the loan. If you know you need appliances or carpeting before you move it, you’d be smart to defer the purchase until after closing and then shop prudently.
Banks are still in the business of making mortgage loans, but the higher credit requirements make loans harder to come by – and slower to process. For homeowners still hoping to take advantage of the $8,000 first time homebuyer credit, starting from scratch to find a loan that can be processed in time may be very challenging.

If you are thinking of buying a home in the Minneapolis / St. Paul area, give us a call. We would love to earn your business! We can even refer you to good lender.

Tony and Lori Ashworth
952-997-8899