Rates of houses rose in the end of 2016 in a bit steeply manner, thus making homebuyers disheartened. Nevertheless, it doesn’t really mean that one should give up this American Dream of buying a home.
The direct effect of rising rates basically hurts the home loan qualification criteria. So, if you think that you were expected to merely qualify for a loan before Christmas, you won’t be able to do so now.
Let’s have a quick recap of how the volatility of rates has affected the general capability of home buying, and how you can be a bit flexible in order to qualify for home loan.
A little recap of 2017 from the perspective of rates
The rates rose during the time between Christmas and general election. This rise in rates was driven by a belief that there would tax cuts and deregulation. Thus, an increase in rates was expected to make things even.
Normalization of rates after the sudden spike was expected and this is what is happening. However, it is happening in such a way rate fluctuation has become consistent. Due to the fact that investors are taking time to get adjusted with the government policies, the rates rise and then fall down on daily basis. One day, there is a forecast for the lower rates and then it is for the higher rates the second day.
If calculated, the rates, on average, are 0.5% higher as compared to those before elections.
Investors and Federal Reserve are trying to figure out the rate direction under the new government, and this is the probable reason that unpredictability of situation is likely to continue at least for a while.
How affordability is affected?
The purchasing process of a home that is worth $350,000, the down payment required is usually 20%. A 0.5% increase in the rate of this house means you will have to pay $17,000 extra.
You may think that you are now going to have to choose a smaller home or a home with bad neighborhood. But, you can figure out the solution if you think like lenders do.
To qualify you for a loan, the lenders use Debt-to-income ratio, also known as DTI. Using this method, they calculate the percentage of your incomes that you spend as bills. If this percentage is above 43%, you disqualify for the loan.
So, if your annual income is $65,000 and you pay $615 as bills on monthly basis, you would qualify for the loans before Christmas but now you don’t.
So, is it possible to increase affordability?
Yes, certainly. For instance, let’s assume that your credit card payment for a month is $125. You can get this monthly payment reduced to $45 in order to qualify for $350,000 loan. For this purpose, you will have to pay the balance of $2000 on immediate basis.
It is certainly much better as compared to considering a home with less worth.