Home Buyers Bring the Money
The buyer, seller, lender and the whole economy are all tied together in the real estate world.
Financial issues that impact a home buyer’s ability to buy a property are both personal and macro-economic.
The home buyer has a maximum price they can pay to purchase a home. This maximum price depends on a few personal financial issues. The amount of cash assets to purchase the home as a full cash offer is one way to measure the limit of a home buyer. The amount of cash is equal to the purchase price.
If the home owner needs a real estate loan to purchase the property, then the down payment is a foundational concern. Down payments can be as low as 3.5 percent of the purchase price. Most lenders charge a PMI or MIP if the loan is greater than 80% loan to value. Therefore a down payment 20% or more avoids that high monthly cost of PMI or MIP.
The next issue is how much money the lender will commit to the deal. Simply add the down payment and mortgage amount to find out how much home purchasing power is created. A simple example is a lender is willing to commit $200,000 and a 10% down $20,000 equals $220,000. There are closing costs to consider. The transaction cost would be minus from that gross amount to find out how much home the borrower could buy, unless there are other funds to add to the deal.
The mortgage lender determines the amount to loan based on underwriting guidelines. Some of the rules are the borrower’s income, the loan to value ratio, borrower’s monthly ability to pay, the front end and back end ratios, and credit information.
Issues that change consider a home owner who is interested in purchasing a particular home. A year earlier, the buyer qualified to borrow sufficient funds to pay the seller’s price. However, mortgage rates have risen and the buyer is now unable to borrow the same amount of money. This is an example of how macro-economic impacts an individual’s ability to buy a home.
The buyer’s purchasing power is the driving force behind real estate pricing. On one side of the scale sits the buyer with money. On the other is the seller with a property. Between them sits the all-powerful lender. This is the reason the buyer, seller, lender and the whole economy are all tied together in the real estate world.
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