One of the key things to keep in mind if you’re thinking of buying a home and even before you begin your search is to know how much you can afford to spend on that dream home.
This process might be a bit more complicated than you realize especially if you’re a first time home buyer or are looking for the San Diego home loan that fits your needs the best.
As an experienced San Diego mortgage broker, this is the kind of expertise I provide to home buyers whether you’re a newbie or a pro.
Figuring out how much you can afford isn’t as complicated as you think but it does have to take into account a number of variables so you can get a solid grasp on what is both financially realistic and comfortable for you as a prospective home buyer.
So, what are these variables? Let me walk you through them step by step so you can build a solid financial blueprint in finding that ideal price range.
What Are the Variables that Determine How Expensive of Home You Can Afford?
The following is a list of financial variables you need to take into account before you can determine the price range of a home you can afford to buy. Then, I’ll take you through each one step-by-step and explain what you need to know.
The variables that determine the price range of the home you afford to buy include:
- The individual San Diego home loan program you choose to finance your home
- The amount of down payment you can afford
- Your Income
- Your Debts
- Your credit score
- Interest rates
- The amount of property taxes payable and potential Mello Roos
- HOA (Home Owners Dues)
1. Types of Programs for San Diego Home Loans
There are a wide variety of home loans available in San Diego. As a highly qualified San Diego mortgage broker, I know which are the most suitable for each individual situation and can provide you with a range of mortgage solutions.
The first thing to understand is not everyone will be qualified for all of the different loans available. One of the biggest factors determining whether you can qualify is your total Debt to Income ratio or DTI.
Having said that – let’s take a brief look at what’s available and how these different programs can affect your decision in finding that ideal price range.
FHA Loans
A San Diego FHA loan is perfect for the first time home buyer as well as repeat buyers because they only require a low down payment of 3.5% while you can to have a credit score as low as 580 (though many lenders require a credit score of 600). Currently, interest rates are slightly lower for these loans than those found in conventional loans.
FHA also allows a higher Debt to Income ratio than conventional loans. In many cases you can get approved up to a 50% DTI when the file is run through the automated underwriting system. This is especially important now that we have the qualified mortgage regulations to deal with.
FHA loans require 2 variations of mortgage insurance. The first is an Up-Front-Mortgage Insurance-Premium which can be tacked onto the loan amount at closing or paid in cash and equals 1.75% of the purchase price.
The second is an annual mortgage insurance premium and it depends on the LTV (Loan to Value) and can vary from 1.30% to 1.35%. The mortgage insurance payment will be part of your monthly payment.
VA Loans
San Diego VA loans are available for active armed forces service personnel and qualified veterans. If you are eligible, you can get up to 100% financing in San Diego to $527,500. Interest rates for these loans are very competitive, which can help keep your payments down.
Although VA loan eligibility is not determined by a credit score, most lenders have a cut-off point for a credit score of around 620. VA loans are much more lenient with Debt to Income ratios. In fact, I have obtained approvals with a DTI as high as 60%.
Mortgage insurance is not required for a VA loan but there is an upfront funding fee equivalent to a percentage of the loan that is payable. The amount is dependent on the type of veteran, the amount of down payment, if the veteran is disabled, and whether a VA was previously used by the applicant.
Conventional Fixed and Adjustable Rate Mortgage (ARM) Loans
San Diego Conventional loans will be a better option for clients with higher credit scores, lower DTI’s and larger down payments. We can get conventional loans approved at a 45% DTI, up to a maximum of 50% with a strong file. These loans will typically have more competitive terms which will help keep your monthly payments lower.
The types of available conventional loans include a traditional 30 year and 15 year fixed mortgage, along with 20 year and 10 year fixed terms as well.
Adjustable rate mortgages that are fixed for the first 3, 5, 7, and 10 years (3/1, 5/1, 7/1, 10/1) are also available. These loans typically will have lower interest rates to begin with than a traditional fixed rate mortgage.
Mortgage insurance will be required for those who have a down payment of less than 20%. A conventional loan will allow as little as 5% down. With every extra 5% down payment, the mortgage insurance will be lower, until you reach 80% loan to value.
Jumbo Loans
San Diego Jumbo loans are available as 30 year fixed, 15 year fixed, or as fixed period ARMs. They are available up to $5 million. Most jumbo loans will require at least 20% down payment, but we have some options that only require 10% depending on the total loan amount.
These types of loans will require a DTI ratio of 41% up to a maximum of 43% and additional reserves. For more on Jumbo loans click Here.
USDA Loans
San Diego USDA loans are offered through the Department of Agriculture and allow 100% financing for the purchase of rural properties and are available in only specified counties and for specific types of homes.
This program allows debt to income ratios up to 48%. For more on USDA Loans click Here.
Now that you know more about the types of loans available, you will be able to explore them further to see which ones would be most suitable for you considering your overall DTI, the amount of your down payment, and your credit score.
2. Your Interest Rate’s Affect on What You Can Afford
Interest rates pretty much speak for themselves. Ideally, you want to get pre-approved at a rate that is about a half percent higher than current rates just in case San Diego Mortgage Rates increase before you find a home.
The less you have to spend on your monthly mortgage, means that you might be able to afford a more expensive home in a higher price range.
Interest rates will vary from loan to loan and again will be dependent on your credit score, down payment and the type of loan for which you can qualify.
A 1% increase in interest rates will lower your purchase power by approximately 10%.
If you would like to get a Free interest rate quote to see where rates are currently, click HERE.
3. Your Down Payment’s Affect on What You Can Afford
The down payment is another crucial piece of the puzzle to determine how much home you can afford. This will impact you in 2 ways.
First, no matter how low your debt to income ratio is, you will be limited by how much you have available for your down payment. If you can afford the payment for a $500,000 purchase, but only have $10,000 available, you will be limited by the down payment you have.
The amount of the down payment will also have an inverse impact on your DTI. The lower the down payment, the larger the loan, and therefore the higher the mortgage payment will be. If you have a higher mortgage payment, your DTI will be higher. The lower down payment can also affect your interest rate as it impacts which type of mortgage loan you can qualify to obtain.
As a San Diego mortgage broker, I can tell you that determining the amount of the down payment you can afford to put down on a home is crucial in determining how much home you can afford.
Ideally the minimum amount of a down payment that is required to avoid the added expense of mortgage insurance is 20%. If your total down payment available is $100,000, then you might be better off seeking a price range for homes in the range of $500,000. This can be especially crucial if your credit score and DTI only meet the borderline minimum cut-off points to qualify.
4. Your Income’s Affect on What You Can Afford
Obviously, one of the biggest determining factors of what you can afford is your income. For qualifying purposes we use your gross income if you are a W2 employee. Your debt to income ratio is determined by dividing monthly debt obligations by your monthly gross income. In most cases, the more income you earn, the more expensive home you can afford.
If you are self-employed, you should be aware that the income calculations are more complex. In most cases 2 years of tax returns will need to be analyzed and if income is kept low for tax purposes, this will affect how much you qualify for. With the recent changes in mortgage guidelines, a consistent income when you are self-employed is important.
Let’s look at a contrast of what you can qualify for versus what you can truly afford. Your Debt to Income ratio may be fine, but you know that one of the borrower’s may stop working within a year or your income is based on commission and the next few years won’t be as high in earnings.
You may decide to buy a lower priced home so you are comfortable with the payments and don’t run into any issues making the payments in the future.
5. Your Debt’s Affect on What You Can Afford
Your monthly debts are the second biggest factor in determining your DTI and how much you can afford to spend on a home. You may have a great income, but are currently leveraged with monthly debt payments.
The debts that are included in factoring your debt to income ratio are any mortgages, property taxes, homeowners insurance, HOA payments, credit card payments, auto payments, and student loans. Also included would be any alimony or child support.
As we have seen with the various types of San Diego home loans described earlier, different types of loans have different cut-off points for the DTI (Debt to Income) ratio you can carry in order to qualify for a particular loan.
When it comes to monthly debts, there are other factors that you as a homebuyer need to take into consideration when buying a home. Even if your DTI is low enough to qualify, you will want to make sure you are not getting in over your head.
Do you have any upcoming expenses, like the need for a new car or sending a child to college? Will the house need any repairs or upgrades that will carry a monthly payment with it? Have you considered what the utility bills will be? A larger home will cost more to operate.
Make sure that you give yourself a cushion for any unforeseen expenses.
6. Your Credit Score’s Affect on What You Can Afford
Your FICO score is often vital to the amount of home you can afford as it has a direct bearing on the type of loan you can get approved for.
This can mean the difference between obtaining a conventional loan or having to opt for an FHA loan. Different loan programs mean different interest rates and the rates affect the mortgage payment, and therefore your DTI.
A higher credit score may give you a better opportunity to obtain a loan at a lower interest rate. So the higher your credit score, the more of an advantage you have for some wiggle room when it comes to deciding how much to spend for your next home.
You should always check out your credit score before putting an offer on a home. Credit reporting agencies do make mistakes and there are plenty of credit issues that spring to light due to identity theft. These issues can be cleared up beforehand and can make all the difference.
7. Don’t Forget to Consider Your Property Taxes and Mello Roos
When you are considering buying a new home here in San Diego, don’t forget the impact that property taxes can have on what you can afford. They are one of the items included in your DTI.
Property taxes are initially assessed based on the purchase price of the home. Because we have prop 13 in California, the property taxes of current home owners are kept lower, but when you purchase a home, the lender is going to use a base tax rate of 1.25% PLUS any special assessments that may be levied for certain neighborhoods such as a Mello Roos. This could cause your property taxes to be much higher on the home you buy, then the home you sell.
A Mello Roos is an additional property tax levy assessment that allows a community to repay bonds which were used to finance public infrastructure.
So, if you plan to buy a $700,000 home for example, your property tax assessment could cost you around $8,725 dollars per year in property taxes alone. This also has to be factored into your budget when you are thinking of buying a new home and how much you can afford to spend.
8. HOA Payments Can Also Impact What You Can Afford
If you are planning to buy a condominium or a home that is in a Home Owners Association, you will also have to take into account the extra monthly expenses you will pay to the HOA.
These monthly fees are generally for upkeep of common areas such as landscaping, the pool, and tennis court and can include a whole host of other things such as legal obligations.
Some HOA fees can be in the $400 – $500 range per month, which could have a large impact on your monthly payments and DTI.
Bottom Line
As you can see, there are a number of variables that go into determining how expensive of home you can afford. As a San Diego mortgage broker, I have the expertise to help you decide how much you can afford.
If you want to get pre-approved right away, CLICK HERE. If you need more information or have some questions, please call me at 619 – 312 – 0612. I am happy to help you decide what purchase price you can qualify for and what purchase price you are comfortable with.