To buy a home, most people take out a conventional loan, either a matching loan that stays below the limit set by the federal guarantors Fannie Mae and Freddie Mac, or a hefty loan that goes above that limit and costs a bit more as a result.
As of November 1, 2021, the Mendocino County loan limit for matching loans was $548,250. However, the limit has just risen to $647,200 based on the sale prices of owner-occupied single-family homes in our area.
What does this mean? This means that more people may be able to purchase homes in the $700,000 to $800,000 range. Prior to November 1, borrowers with a 20 percent down payment were capped at $685,000 (making the loan amount $548,250). With the new loan limit, borrowers with a 20 percent down payment can now buy a home for $809,000. Be careful: just because you can do something doesn’t mean you have to.
The new loan limits are based on rising home prices, not rising incomes. So the question becomes: How much income do you need to qualify for this larger loan? If you are an absolutely perfect borrower with no flaws on your record, no debt of any kind, and a solid, verifiable family income, you could potentially qualify for the 49 percent debt-to-income ratio. If the loan amount is the new loan limit of $647,200 and the interest rate is, say, 4 percent (which is arbitrary, since I’m not allowed to set current rates), your monthly loan payment will be $3,089. On top of that, you’ll pay approximately $810 per month in property taxes and approximately $200 per month in homeowners insurance, for a total PITI of $4,100 per month.
If you use these numbers and are an ideal borrower who buys a home in perfect condition, you can qualify for that home with a family income of $8,400 per month or just over $100,000 per year. Can you do this? Yes. Do I recommend it? No, not many people would be happy to spend half of their income on home payments, especially when you consider that home ownership comes with more expenses than just a monthly PITI. I usually recommend that homebuyers set aside about 3 percent of the purchase price for annual maintenance and upkeep, because at some point roofs need replacing, walls need to be painted, water heaters need updating, dishwashers need fixing, not to mention the kid next door. A reliable baseball bat and a bad target. On a $809,000 home, you should set aside $2,000 a month for repairs and maintenance.
That’s why I like to see people keep their loan repayments to a maximum of 35 percent of their income. If you’re going to hit the limit on the matching loan cap with a $4,100 payment, I’d say your household’s monthly income should be at least $11,500 per month or roughly $140,000 per year.
If you are looking for a local loan officer, this is the way to go, may I suggest contacting Jenny Richards at Kind Lending. Not only has she provided details about loan limits for this article, she really knows her stuff and often goes the extra miles for her clients.
If you have questions about real estate or property management, please contact me at firstname.lastname@example.org or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a gift card to Schat’s Bakery. If you want to read previous articles, visit my blog at www.richardselzer.com.
Dick Selzer is a real estate broker who has been in the field for over 45 years.