Question: Will I be able to qualify a loan now that mortgage rates are up?
Answer: No doubt mortgage rates are up. This does not mean mortgage loans are no longer affordable. Some borrowers, however, will have to re-think their strategies.
Rising mortgage rates
Weekly mortgage rates stood at 3.99 at the end of 2017 versus 4.62 percent in mid-June according to Freddie Mac. That’s a big jump, especially since rates have been so low for so long.
Higher rates can impact marginal borrowers, those financing on the edge of affordability. According to Lawrence Yun, chief economist with the National Association of Realtors (NAR), each .1 percent rate increase results in 35,000 fewer home sales. Since rates have risen roughly .6 percent since December that suggests 210,000 fewer sales this year. In April – when rates were lower — existing home sales were down 1.4 percent when compared with a year earlier, according to NAR.
When mortgage rates rise there are typically fewer buyers in the marketplace. With less demand we should expect home prices to stabilize and in some markets to actually decline. However, the current market is troubled with an inventory shortage. People are staying in their homes far longer, in some cases because they have 3 percent financing. Whatever the reason, the inventory shortage is causing prices to firm.
“The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home,” Yun explains. He adds that “the healthy economy and job market are keeping buyers in the market for now even as they face rising mortgage rates. However, inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.”
Despite the fact that mortgage rates are up as well as the inventory shortage the reality is that monthly costs have not increased substantially. If you borrow $150,000 over 30 years at 3.99 percent the monthly cost for principal and interest is $715.26. Increase the rate to 4.62 percent and the monthly expense rises to $770.76. That’s an increase of $55.50 a month or about $13 a week.
As mortgage costs rise the qualifying problem grows. Lenders will only allow borrowers to spend so much per month for debt, including real estate debt. Lenders compare debts to monthly income to compute the debt-to-income ratio (DTI). If debts are too high the loan will be declined.
It’s entirely fair to say that rising mortgage costs can be a DTI concern. However, it’s also fair to point out that mortgage costs are not the only DTI issue. The reality is that many Americans have big monthly expenses because of non-housing debts. The Federal Reserve Bank of New York says that student loan debt in the first quarter amounted to $1.41 trillion, up from $580 billion ten years ago. Auto debt during the same period rose from $810 billion to $1.23 trillion.
In contrast mortgage debt has actually declined. It stood at $9.38 trillion during the first quarter versus $9.90 trillion ten years earlier. Not only do we have a smaller amount of mortgage debt, it actually costs less. The annual mortgage rate was 6.03 percent in 2008 compared with 3.99 percent in 2017. The $150,000 mortgage mentioned earlier would have a monthly cost of $902.22 at 6.03 percent. That’s a LOT less than $770.76.
Change with the market
Marketplaces change and that means borrowers must also evolve. For borrowers with good incomes and credit the new and higher rates seen in June 2018 represent an additional cost but not enough to endanger a loan application. For marginal borrowers, those near lender guidelines, additional mortgage expenses could be a problem.
What to do?
One strategy is to find a less expensive property and borrow less. Another is to reduce high-cost credit card debt. This may require some lifestyle changes – maybe eating out less – but lower credit card debts are always a good idea. Lastly, develop a budget and stick to it. You can save every month, pay down debts, and make higher mortgage rates entirely affordable.