Rates are a lot higher now aren’t they? At least in relative terms. Just a few weeks ago mortgage rates were again near historic lows, with a 30-year mortgage flirting with five percent. Today? Closer to six percent. Still much lower than a few years ago, but higher nonetheless. Should you be worried? Of course not. But if you’re pushing debt ratios and haven’t locked or closed yet, get your loan officer on the phone.
The mortgage rate environment, over the past three years give or take, has been steady. Up a little, down a little. It’s one of the main reasons homeownership rates are so high; along with strong home sales. And that’s a good thing as it’s brought a lot of people into the market who may have otherwise not been able to buy. As rates stay low affordability climbs. But if rates go back up, lots of people find themselves still in the rental category.
It doesn’t take much to move a mortgage payment. For instance, you found a house for $200,000 and put 20 percent down, getting a loan for $160,000. At 5.25 percent, your payment would be about $883. Using escrow accounts for taxes and insurance of around $250 and a gross monthly income of $3,600, your housing ratio approaches 31 percent. Not bad, really. Let’s also say you have a car payment of $350 which pushes your total debt ratio to 41, which is a house payment ($1,133) plus a car payment ($350) divided by your gross income ($3,600), which equals .41, or 41 percent.
I know of loan programs that have a maximum debt ratio limit of 41. If rates are at 6.00 percent, that pushes your principal and interest payment up to $959. Using the same example, your ratios now go to 43 percent. Not an alarming number, mind you, but if you were on a special loan program that limited ratios to 41 percent, suddenly you’re not qualified anymore. Yeah, I know you’ve got a preapproval letter in your hand saying that you’re okay, but unless you locked in your loan that preapproval letter is no good. You’ll need to put down more money or buy your rate down to 5.25 percent. Both choices are not so appealing.
Most loan programs don’t care much about a two percent change in debt ratio and really mean very little, especially if you’re already locked or you’re closing at the end of the month. But if you’ve been preapproved for a mortgage loan and you haven’t secured your rate or your closing isn’t taking place for several months, it’s time to call your loan officer and find out what rising rates can do to your affordability. If you’ve been approved by an eyelash, call your lender and make sure you’re going to be okay in a higher rate environment and if not see what can be done to lock in a rate that fits your approval.
Written by David Reed