About a year ago a good friend of mine decided to buy a new home. He is a very successful business owner, but last year his income had dropped a little bit. He had enough money in his savings account to pay cash for the house he was buying, but with rates being so low his original thought was to finance the house with a 20% down payment. He worked with an independent mortgage broker who had the ability to work with many different lenders, and he was shocked to learn that no one would give him a loan to buy this house. He ended up using the cash in the bank to buy the home outright. 

Later he found out it was because he was self-employed and his business income had dropped from the prior year that the banks didn’t want to work with him. When I hear his story I am reminded that, in most instances, banks make loans based on your income and not necessarily your assets. 

Selling your home is a big deal. It may be one of the biggest financial decisions of your life, and I wouldn’t want you to venture into this without considerable thought. But at the same time, I keep hearing people tell me they are waiting for the housing market to recover before they sell. Below are a couple of things you may want to consider.

The 2010 census bureau information is now available for Kitsap County. The median household income from 2007 through 2011 is $61,112. 

Let’s use some of this data to see just how much home the median family in Kitsap County might be able to  afford. Assuming this hypothetical couple has a monthly car payment and credit card payment that totals $250 per month. We will assume they have $20,000 for a down payment, and we will use the median household income of $61,112 per year. With today’s interest rates at 4.50% for a 30 year mortgage, Zillow says this couple could afford to purchase a home valued at $269,476. Remember banks lend based on your income not your asset,s and they are concerned with your overall debt to income ratio.

On June 28th the Wall Street Journal ran an article that pointed out mortgage rates posted their largest weekly increase since 1987 when rates jumped from 3.93% to 4.56%.  These all time low interest rates have been allowing borrowers to borrow more money for their home while keeping their overall payments low.

In the scenario above, if the same couple were trying to buy a home with interest rates at 6.5% they would only be able to afford $226,380 according to zillows home affordable calculator while keeping the debt to income ratio at 36%.

Interest rates have been hovering at or near an all time low for a long time. When rates begin to rise, it may mean that you will have to adjust your price down to be able to find a qualified buyer. This may be the best market for selling a house for a premium for some time, but as always consult a professional before you make any changes to your investments or decide to sell your home.