How To Avoid Buying Too Much House

How Much House is too Much

Too Much House

If you’ve never heard the phrase “buy too much house” before, it’s a good one to be familiar with. Buying too much house means you buy a more expensive house than you can afford. Sure, you may be able to make the minimum monthly payment and the lender approved you for the loan so you’re good to go, right? Wrong! It’s very possible to be approved for a home that’s more expensive than you really should be buying. The difficult thing about this is that it’s very subjective; you can’t just throw out blanket rules that are the definitive measurements of how much house you can afford. While there are guidelines that can be laid out, and there are definitely indicators of whether you’re buying too much house, only someone intimately familiar with your finances (as you hopefully are) can know for sure if you are buying too much house.

 

You Are Your Own Master

No one is responsible for this besides you. The loan officer is not there to tell you how to spend your money, and plenty of loan officers will tell you they’ve closed on plenty of loans that they would never have done if they were the borrower. Why? Because it’s not the loan officer’s job to tell you how to manage your money. You’re a big boy or girl and you can make your own decisions. Unfortunately that means that we all need to have a clear understanding of what we’re getting ourselves into when we buy a house, and we need to know the guidelines and red flags to keep us from getting more than we can really afford. This responsibility to both learn about how to know if you’re buying too much house and to choose not to do so is yours and yours alone, so take it seriously. Plenty of responsible people got hit hard when the recession hit, but the ones that got hit the hardest were people who bought too much house in the first place.

 

Your Debt-to-Income and Other Signals

There are a few things to look at that can help you know how much house you can afford. The first one is your Debt-to-Income ratio, abbreviated as your DTI. You will not usually get approved by a lender if the addition of the proposed monthly payment brings your DTI higher than 41%, though there may be some exceptions. That said, 41% is a pretty high DTI, and if you’re flirting with that line, that’s a really good indicator of buying too much house. 35% is much better, and 30% is where you start to be in really good shape. Now, we’ll talk about this more in-depth in a bit, but choosing a 30-year fixed because the 15-year brings your DTI close to 41% would not be a great decision. Other signals include how much credit card debt you have – your DTI only incorporates the minimum payment on your cards, which will result in a large amount of interest over time, so you’ll want to evaluate how much credit card debt you have and how quickly you can pay it off. You also want to look at how stable and reliable your income is, and whether it’s likely to get larger, go lower, or stay the same. Are you in the sort of position where it’s likely your hours will be cut as employers comply with Obamacare? Those signals are less concrete but all help to paint a clear picture of what you can realistically afford.

 

The Effect of the 30-Year Fixed

The 30-year fixed is a very divisive thing in the mortgage industry – many (like this author) look at the 30-year fixed as a poisonous viper that’s out to get borrowers and ruin the potential wealth that buying a house can bring. Others look at the 30-year fixed as the door that has opened up homeownership to literally millions of families who would not have been able to afford it otherwise. Regardless, the 30-year fixed can easily lull borrowers into buying more house than they can afford. Why? Because the monthly payment drops so much on a 30-year that all of the sudden the DTI is fine, the income is fine, and borrowers can suddenly qualify for the house they want. While this can work out just fine, and has for many people, this can also be a recipe for disaster, and is a good way to buy more house than you should be. If you can’t qualify for the loan on a 15-year fixed, chances are you shouldn’t be buying that expensive of a home. It may seem rough, but you’ll accrue equity much, much faster on a 15-year fixed so you’ll actually be able to save up a big down payment to pay down the balance on a more expensive home more quickly.

 

FAQ; Cash Back Closing Purchase Loan

 

Can I Get Cash Back at Closing of a Purchase Loan?

Cash out Good News

There’s good news and bad news to this question. The good news is, “Yes, you can!” The bad news is that you almost definitely can’t get it for the purpose you’re thinking of. Many borrowers are hoping to get cash back to improve the home, pay off a car, help a child go to college, go back to school themselves, or tackle some outstanding credit card debt. The answer to this question will come as no surprise to anyone who has purchased a home before or understands how getting cash back on a mortgage works in general. We’ll explain it all in as much detail as possible so that you can understand how you can get cash back on a new purchase VA loan and why it is the way it is.

 

There are two ways to get cash back at closing on a VA purchase loan. If the loan is structured correctly, you can get your earnest money back (woot!) and that’s just about it. Sometimes confused with getting “cash back” is getting what is called an Energy Efficiency Mortgage in addition to your purchase loan. An EEM is an add-on the VA allows for VA borrowers to make improvements to their home that lower their utility bills. The maximum amount that can be gotten out on an EEM is $6,000, and the VA requires fairly detailed accounting of the changes the veteran is planning to make, and quotes from professionals on how expensive the work will be to do. You are not allowed to use funds from an EEM for anything else besides energy efficient improvements to your home. While this may have been exactly what you were hoping to hear, it’s more likely that you’re disappointed with your options.

 

It may be comforting to know that the VA loan program is not unique in this regard. As most current homeowners will be able to tell you, there’s nothing magical about getting cash out on your mortgage, and once you  know how it works, not only will you know when you can get equity out on your mortgage, you’ll also have a pretty good idea how much cash you’d be able to get. Getting cash back on your home is done by taking advantage of the equity you have in your home. In order to get cash out on your home, you have to have equity in it.

 

What is equity? Equity is how much of the value of your home is yours to keep. Equity is calculated by taking the current value of your home and subtracting how much principal you still owe on it. The remainder is how much equity you have. For example, let’s say my home is worth $200,000, and I still owe $150,000 on it. I have $50,000 of equity in my home. You may need to get an appraisal done to determine the current value of your home, then go back into the records of your mortgage payments to see how much principal you’ve paid off. Remember, that a sizable chunk of your monthly payment is going towards interest, not principal. Your lender or loan holder can also probably tell you how much principal you’ve paid off so far. You will only ever be able to get as much cash out on your mortgage as you have equity in your home, because the cash out that you get is considered part of your mortgage, and is secured by your home. You will never be able to get a mortgage for more than your home is worth.

 

So why can’t you get cash back on your mortgage on a new purchase? Because you don’t have any equity yet. If you do have equity, it’s because you’re making a down payment on the home. It doesn’t make much sense to give money as a down payment, then try to turn around and get your down payment back as cash-out on your mortgage. A lender will almost certainly not agree to such an arrangement even if there was a reason you would want to. By offering an EEM as an add-on, the VA loan program is doing its best to offer the means for VA borrowers to lower their utility bills and raise the value of the home in one stroke.

 

How to Improve Your Credit Score

How to improve your Credit Score

 

One of the best pieces of advice for preparing to get a VA loan is to start your preparations at least a year, and preferably two, before you actually apply for the loan. Why is this? Primarily because of what it takes to get your credit report in proper order; delinquent debts can stay on your credit history for months after they’ve been paid off, and sometimes it can take months to pay off your existing debt.

Your credit score is an algorithm-based evaluation on your overall credit-worthiness at the time the score is requested, while your credit report is a listing of all the factors that went into calculating your credit score. Check out this guide to help you get on task and own your credit before it owns you.

 

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*Annual savings calculator based on 2015 monthly average savings extrapolated year-to-date.