The scenario is this -- you're a buyer and you're ready to look for a house. You've met with a lender, who has told you that you can get a loan for $350,000. You even have a lender letter that says you are pre-approved for that loan amount. Now you're ready to look for a house, right?

But lenders don't approve buyers for loan amounts, they really approve them for a monthly payment. Why is this so important to understand?  This is because there are things that can change -- two big ones, in fact. The first is the interest rate, which can change at any moment up until the time you lock your rate with the lender. The second is the property tax, which varies by house and neighborhood.

So, the lender says you are approved for a monthly payment of $2,550, assuming an interest rate of 5.75% and property taxes of $5000 per year (and you're putting down 20% to avoid that mortgage insurance). This works out to a loan amount of $350,000 -- with 20% down, that's a $437,500 house! Not bad! But let's assume that while you're looking for a house, the interest rates go up half a percent to 6.25%. Remember, you're still only qualified for a monthly payment of $2,550. The increase in interest rate translates to a loan amount of $331,700. 

That means that, with a 20% downpayment, you just went from looking at $437,500 house to a $414,600 house -- an $22,900 loss in buying power!

The same thing happens with changes in property taxes -- the property taxes are a huge factor in how much house you qualify for. I recently saw a lender letter approving a buyer for a house, but the taxes that the lender used were almost $4000 less per year than the houses we were looking at! It makes a huge difference.

So make sure you know what these numbers mean to you. If you're not sure, give me a call -- I can help you work out the numbers.

(C) Susan Pruden.