How your property affects how much you can afford

You did it! You got pre-approved to buy a house, but that piece of paper doesn't mean you'll be approved to buy any home. The property itself can impact what you can afford. So before you fall in love with that 2 bed/2 bath, keep these things in mind.

1. Property usage

Primary residence, second home, or investment property? How you plan on occupying your new home can affect your mortgage pricing options. Your lender will verify your property’s occupancy during the underwriting process to determine your loan options. (Keep in mind that property usage depends on occupancy, not how many homes you’ve ever bought or currently own.)

For a home to be considered a primary residence, you must live in the house for the majority of the year, among other specifications. Primary residences qualify for the lowest minimum down payment (as low as 3%) because they are perceived to have the lowest risk.

If you plan on living in the house for some part of the year, and it’s at least 50 miles away from your primary residence, it will typically be treated as a second home. Second homes have similar interest rates to primary residences but require a larger minimum down payment.

Lastly, if you’ll be renting out the house and/or it’s within 50 miles of your primary residence, it will usually be considered an investment property. Investment properties tend to have the highest interest rates and down payment requirements of the three.

TIP: If you won’t be living in your new property full-time, keep in mind that the home’s location can affect whether or not it’s considered an investment property. If you choose a home too close to your primary residence, you’ll be subject to higher mortgage rates.

2. Property type

You might have been pre-approved for a single-family home, but what if you find a condo that’s a perfect fit? Even if the list prices are identical, that condo might be more expensive and difficult to qualify for. Condos and townhouses tend to have higher interest rates and often have HOA fees, which your lender will have to factor into your mortgage qualification.
You may also have difficulty finding a lender that will work with certain types of properties. Tricky property types include manufactured mobile homes and non-warrantable condos, which do not meet conventional Fannie Mae guidelines.

TIP: If you’re planning on buying a condo or townhouse, make sure to ask your real estate agent and lender about the building’s warrantability and HOA fees before you go any further in the process.

3. Competitive market

If you’re looking at homes in competitive neighborhoods, there’s a chance you’ll end up in a bidding war that pushes you over your initial budget. This can be especially problematic if you are on the cusp of a jumbo loan (a loan that is larger than the local loan limits set by the federal government). Jumbo loans have unique underwriting requirements which may affect the minimum down payment, required assets, and credit score you’ll need in order to qualify. Jumbo loans also come with higher interest rates since lenders consider the larger loan amount to be riskier.

TIP: If you could be pushed over to jumbo loan territory given the competitiveness of your market, make sure you talk to your lender about the eligibility requirements and how your pricing might change.

4. Property tax rate

Property taxes are determined locally and vary from area to area. Tax rates can be quite high in certain areas, and they can add significantly to your monthly payment. Also, keep in mind that tax rates change over time, so these costs could potentially rise.

TIP: It’s a good idea to research current and historical tax rate trends before shopping. That way, you’ll only spend time and energy searching in neighborhoods that fit your budget.

5. Local mortgage discounts

Yes, they exist. Depending on your home’s location and your financial profile, you might be able to take advantage of loan savings programs. These discounts are determined block-by-block, so a certain house might have a better rate or lower minimum down payment than the house across the street.

TIP: As you search for potential properties, see if a specific home offers an additional savings opportunity by using our Mortgage Discount Calculator.

6. HOA fees

Monthly homeowners association (HOA) fees are required in certain condo communities and single-family home neighborhoods. These fees go towards maintaining and improving properties in the association. This additional expense, often several hundred dollars a month, can be significant over time. As mentioned earlier, HOA fees can also affect your ability to qualify for a loan since they need to be factored into your debt-to-income ratio.

TIP: Look to see if HOAs are common in the areas you’re shopping in. If so, talk to your lender about how these fees might affect your loan qualification. Also, consider adding these HOA fees into your monthly budget and adjusting your price range accordingly.

7. Utility and maintenance expenses

You might not have pictured a pool or even a yard, but if the house you want has either, it will be a new expense your budget will need to absorb.

TIP: Consider estimating the total cost of this maintenance over the course of a year, divide it by 12, and start putting that amount of money away each month in a separate savings account. That way, when those expenses eventually arise, you’re prepared.

Need help figuring out if you can afford a specific house? Schedule a consultation with one of our licensed Mortgage Experts to get some guidance.