Interest rates are starting to bounce back. The Federal Funds Rate has almost doubled in the last year alone.
As interest rates rise, not only does the monthly mortgage payment increase but so does the amount of income needed to qualify for the loan.
For example, let’s say you are trying to by a $550,990 house. If your interest rate goes from 3% to 5%, your payment goes from $1,858 to $2,366. That is roughly $500 per month and over a 27% increase in your payment!
Furthermore, you need to prove to your lender that you can afford this new higher payment. Instead of needing roughly $100,000 to qualify for this mortgage, now you need approximately $120,000. That’s 20% more qualifying income (because not all sources of income count) to qualify for the mortgage needed to buy your dream house.
This is all assuming that you have 20% of the purchase price saved up for the downpayment. If you have less than 20% then you’ll need to borrow the difference. That little difference is more expensive because it will need to be insured separately from the rest of the loan.
Have a look at the infographic below which depicts the above-mentioned scenario.