Monday, October 19, 2015
By Jed Williams
Your Magic Borrowing Number

Do you ever wonder how your mortgage lender comes up with the magical number of how much you can spend on your future home? It may seem too low or too high, depending on where you think you stand financially. Perhaps you compare your situation with your friends’ situations, thinking you make the same amount of money, but the type of home you can afford is way different than they home they just bought. Apex Home Loans sheds some light into the situation.

You might say, “My spouse and I have a combined income of $120,000. That means we should be able to afford a bigger home than my buddy whose familial income is only $100,000.” That’s a possibility, but your gross income is not the only factor at which mortgage lenders look. Perhaps you really do make more, and you know that for a fact. But what you don’t know is that your friend and his partner spent five years scraping by on less than they were earning to be able to pay off their student debts, and they were even able to save a little bit extra for a down payment. Maybe he inherited a large amount of money from a deceased relative or has parents who want to be co-borrowers to give him more of a home.

The bottom line is that it doesn’t have everything to do with immediate income. Did you just start your job that pays a little bit better than the job he’s been in for three years? Lenders look at the length of employment in determining the likelihood that a borrower will repay the loan. Did that credit card you signed up for in college really do a number on your overall credit? Perhaps you’ve never had a credit card at all. Lenders want to see a responsible credit history. They want to see that not only have you taken on the responsibility of debts, but you’ve been able to pay them in a timely manner.

The amount you can borrow can also have a lot to do with the term length and interest rate of your loan. If you don’t want to saddle yourself to a 30 year loan, chances are you’ll be approved to spend far less on a home. And interest rates change daily. Your friend “recently” bought his home, what, 6 months ago, a year ago? That could mean entire percentage points of difference. The higher the rate, the less money you can get.

Maybe you were surprised by how much you were approved for on the other end of the spectrum. Perhaps you were approved to spend $500,000, but you know there is no way you’d be able to make the mortgage payment, even over 30 years even at a very low interest rate. Why did the bank do that? Probably for the same reason that you know you could never pay it: because you’re incredibly financially responsible. They see that you’ve had perfect credit since your first credit card at 14 years old. You’ve held long-term jobs since you worked at the local amusement park throughout high school. You held a job throughout college to make sure student debt didn’t get out of control. You are the ideal borrower. Chances are that you’re also too smart to push the limit. Sure, it would be fun to imagine yourself in a half-million dollar home, especially after all the hard work you’ve done to prepare for your first home. But does that image come with minimal furnishings, ramen noodles, and grey hair?

Whatever the number is that the mortgage lender gives you, talk to your agent about it. Sure, money is one of the most awkward topics in our society, but we promise to give a judgment-free zone. We want you to get the most home for the best price without ulcer-inducing stress. We can help to give you friendly, professional advice about what you can reasonably afford, or how to get more money from the bank. Sometimes it’s as simple as paying off your car loan to have less of a debt: income ratio. Maybe you should hold off for another 6 months to get your credit card under control. We’ve done this hundreds of times. There’s almost no financial situation we haven’t seen. We’re here to help guide you through this whole process.

Jed WilliamsJed Williams
Principle Broker and founder of Hagan Realty