More Home for Less Payment

Mortgage preapproval letters can be a bit deceiving.  Your typical mortgage preapproval letter says that a buyer is preapproved up to a set price for their home purchase.  Truth be told though, buyers are not approved for a set PRICE of a home.  Buyers are preapproved for a set PAYMENT.

Isn't the price based off of the payment though?

Yes, the maximum price is based off of the maximum payment.  A lender will decide that a buyer can afford to pay a certain amount each month for a mortgage payment and then back into a home price based off of this figure.

The problem with this system is that the lender is making certain assumptions when they back into this price.  They are assuming a certain interest rate, a certain cost for home insurance, a certain cost for property taxes and a certain cost for mortgage insurance.  If these figures are higher or lower than what the lender assumed, the price of a home that the buyer qualifies for will also be higher or lower.

What else impacts this price/payment calculation?

One of the bigger things that impacts this price payment calculation is the loan type.  This often isn't discussed much though.  Lenders frequently decide on a type of loan that seems to fit a buyer and then shows them the numbers related to that one type of loan only.  That can cap them at a lower priced home than they would have qualified for though, if a different loan type was used.   

Hmmm.....Give me an example please....

Gladly!  Amy and Russ met with me this spring about buying their first home.  They had stable employment, little debt and solid credit, but no down payment.  They could get a gift from their parents for that piece though.

They qualified for a payment up to $1,150 per month.  Many lenders would have said "FHA Mortgage!" and gone with that.  FHA will allow the down payment to be gifted so it sounds like the right fit. 

FHA has its drawbacks though.  There is a FHA financed upfront fee of 1.75% of the loan amount and the monthly mortgage insurance is higher, making the amount they qualified for lower. 

The biggest drawback for Amy and Russ was that this $1,150 payment wouldn't let them buy the home they wanted.  They had fallen in love with a house and they wanted it and only it.  The FHA payment for their dream home was going to be $1,183, so above their $1,150 max.

Saving the Day With Creative Financing

Amy, Russ and I met to go over all of their options and determined that IHCDA's Next Home conventional mortgage was a better fit.  It only needed 3% down and that piece would be provided by IHCDA.  The seller could cover some of the closing costs but they would still need some money to cover the balance.  Their parent's gift could cover that though.

Because the conventional loan had lower monthly mortgage insurance, their payment with this option was only $1,134.  Not only was it almost $50 less per month, but their parents didn't have to gift them as much money with the Next Home option.  They only needed $3,495 from them versus $5,530 for the FHA option.

So...$49 less per month and $2,035 less upfront?  Plus the ability to buy the home they truly wanted rather than have to find a cheaper one to stay under their payment cap?

Yep, that's how the story ended.  Amy and Russ got more home for a lower payment with less money needed upfront thrown in for good measure. 

If you'd like to have this kind of analysis done for your home purchase to make sure you are getting the best terms possible on your Indiana or Michigan mortgage, drop me a line or give me a call today!  (lori.hiscock@ruoff.com email, (574) 234-5201 office).



Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.