One of the first steps we took after officially calling ourselves “house hunters” was to figure out how much home we could realistically afford. We knew our bank balances and the monthly mortgage payment we could handle, but what matters most is what lenders will approve. So we scheduled an appointment with our mortgage lender (the same person who helped us buy and later refinance this house) to review our finances and estimate the loan amount we might qualify for. That number would determine the proper price range for our search.
We were cautiously hopeful going into the meeting. Since our first purchase in 2006 we’ve saved more, and being married now means we can combine assets. Back in ’06 we were engaged and Sherry had only just started freelancing, so her income was viewed as unstable and I had to qualify for the loan on my own. We assumed our position would be stronger now that two of us contribute, but banks have grown more conservative. On top of that, I’d recently shifted to self-employment, so this time my income might be considered less steady. In short: nerves.
Before the appointment we gathered tax returns, W-2s and current bank balances. Our lender’s news wasn’t ideal. Because I’m no longer employed by the company that provided roughly 75% of our 2009 income, lenders wouldn’t count that former salary toward qualification. Instead, approval would be based only on income from our current jobs — basically our blog income as reported on the 2009 tax return. Without sharing specific figures, that left us looking less like a two-income household and more like someone just starting out. Not the result we hoped for.
The lender explained that to have this year’s, higher blog income considered we’d need to wait until our 2010 taxes were filed and official next spring. Cue disappointment.
Just as we were ready to pause the hunt, the meeting took a turn for the better. Despite the income limitations, our strong credit and consistent on-time mortgage payments on our current house could still earn us approval for a loan roughly equal to our existing home’s value. That’s helpful, though buying a house at the same price point wouldn’t necessarily give us the extra space we want as our family grows.
Then our lender reminded us about the equity we’ve built in this house. Since we’ve paid off a significant portion of the mortgage and put a healthy down payment down originally, selling this place would let us roll equity into the next purchase. In practical terms, that means our next home could be larger without overextending our budget. We’re not planning to stretch to the max, but it’s comforting to know the bank’s figures align with our own sense of what’s affordable.
Lesson learned: taking a pay cut to go solo while your spouse is self-employed doesn’t make the most persuasive case to a lender. But ultimately we were pleased with the pre-approval. The loan amount we were offered falls nicely into the range we hoped for — enough to find a slightly larger version of our current house, roughly the size we had once envisioned when we considered adding a modest addition to accommodate a growing family. Being pre-approved also gives us credibility with realtors and sellers, which is a definite advantage.
Now that the financial side is largely clarified, we can focus on the fun part: deciding on style, layout and the features we want in our next home. Knowing Sherry, there will be a detailed list — she loves lists and planning, and this time is no different.
Psst — We announced this week’s contest winner at the end of Monday’s original contest post.