[photopress:MacCommercial.jpg,full,alignright] The next step in the Home Buying Process is determining how much home you can afford and how much you actually want to spend. When buying your very first property, it is important to note that while a lender may tell you that you can afford a property priced at $350,000, lenders do not actually qualify you based on sale price. It has become common practice for the ease of agents and buyers to quote a sale price. But the actual process qualifies you for a monthly payment that includes Principal + Interest + Taxes + Insurance/HOA Dues.
This is VERY important because a Townhome with very high monthly dues can be more expensive, even though it has a lower price, than a Single Family attached townhome.
There are four townhomes on my desk. Let’s look at these as a real life, current example. Let’s calculate the monthly payment based on 20% down and an interest rate of 6.25%. 20% down is clearly not the norm for a first time homebuyer, but the way to finance the amount of loan on the 20% top portion, varies greatly from one individual to the next. So we are eliminating that factor to make the point that taxes and homeowner dues, can impact the price at which you can purchase, even though your “lender letter” says you qualify at $350,000.
1. Price $315,000 – Taxes $1,559 a year – Dues $310 a month (Condo Townhome)
2. Price $359,000 – Taxes $2,986 a year – Dues $282 a month (Condo Townhome)
3. Price $365,000 – Taxes $2,064 a year – Dues $239 a month (Condo Townhome)
4. Price $375,000 – Taxes $2,460 a year – Dues $75 a month (SFR Townhome)
1. Payment $1,550 + $130 taxes + $310 dues = Total Payment of $1,990
2. Payment of $,1765 + $250 taxes + 280 dues = Total Payment of $2,295
3. Payment of $1,800 + $170 taxes + $240 dues = Total Payment of $2,210
4. Payment of $1,850 + $205 taxes + $75 dues = Total Payment of $2,130
The homes in price order do not follow suit with regard to monthly payment order. The second lowest price has the highest monthly payment.
If the lender qualified you at a purchase price of $350,000 with 20% down at 6.25% using $200 as estimated dues and $200 as estimated taxes, that would translate into qualifying you at a payment of $2,125. Using the real life examples above, you would actually qualify better for the townhome priced at $375,000 than the one priced at $359,000, even though the lender said your max affordability was $350,000.
When you and your agent walk off with a lender letter at $350,000 and buy a townhome or condo at $350,000, but the lender used $200 a month for taxes and the real taxes are $300 a month, and the lender used $200 for monthly dues, but the real dues are $325…the sale can fail on financing issues. Many owners and agents get very angry when the financing fails, but it really falls upon the agent to know the estimate of taxes and dues used by the lender, so they can adjust on a case by case basis before submitting an offer.
Moral of the story is, when a lender hands you a letter saying “you qualify at a purchase price of $350,000”, make sure you know the interest rate, downpayment, taxes and ins./hoa dues the lender used to come up with that number. Then you can adjust, if you are liking a townhome with dues of $425 a month!
We all know that one complex in Bellevue that has high dues and more “Sale Fail Releases” than any other complex in the Seattle area. Now you know why that is happening.
