As a result, they would simply walk away from the property (and the mortgage), accepting whatever consequences came with that. Typically, a big fat credit hit and the need to find a new place to dwell.
Interestingly, some of these same borrowers now qualify for mortgages again because so many years have passed since that phenomenon began.
So despite many calling the mortgage market too conservative, there are ample opportunities for those with checkered pasts to obtain financing.
The New Walk Away Is an Affordability Thing
I cautioned a while back that affordability was set to fall off a cliff, given the dramatic rise in mortgage rates, coupled with higher asking prices.
And now it’s causing would-be home buyers to walk away from deals. A new Bloomberg report cites several examples where prospective buyers are backing out because of affordability concerns.
One couple in Seattle thought they could afford a $400,000 home because that’s what the math told them back in February when their home search began.
Today, their housing payment is roughly $300 higher than it would have been had they closed before rates surged. As a result, they’re looking at a smaller home instead.
Another family in Portland tried to back out of a home purchase because rates have both increased their proposed housing payment and made it more difficult to sell their existing home. Talk about a double whammy.
This is apparently a trend, according to a Redfin economist cited in the article, who said a lot of agents are dealing with buyers who were in escrow that can no longer afford to buy. All the more reason to make sure your buyer is qualified, even if rates go up.
One Redfin agent said his client is waiting to buy in fall once competition dies down, though there’s the risk that interest rates could be even higher then. And prices.
Just How Bad Are the Higher Mortgage Rates?
You’d think that a couple hundred dollars wouldn’t derail someone’s ability to qualify for a loan, but apparently it does.
When it comes down to it, DTI ratios limit how much a prospective homeowner can afford, so those on the cusp can easily run into trouble if they don’t lock their rate at the outset when they may have been originally pre-approved.
I created some mortgage payment charts to quickly eyeball interest rate changes and their impact on monthly payments.
For smaller loan amounts, the difference in payment is still pretty minimal. On a $200,000 loan amount, the monthly mortgage payment on a 30-year fixed at 4.5% versus 3.5% is only about $115 more.
On a $500,000 loan, the difference jumps to nearly $300, which is a bit more devastating to the old wallet.
This probably explains why homeowners are either looking for smaller and/or cheaper homes, or considering the use of hybrid ARMs, such as the 5/1 or 10/1 to keep payments at bay.