High interest rates make it harder to qualify for a home loan.here’s why

Image Source: Getty Images

High interest rates can keep you from buying your dream property.

Key Point

• Mortgage interest rates have risen significantly this year.
• Higher interest rates make loans more expensive and harder to qualify.
• The 28/36 rule is why.

Mortgage rates have risen steadily this year. And despite recent declines, interest rates are still above 5% and could rise further in the coming months.

Higher interest rates can have a big impact on the cost of your mortgage. However, it can also have other negative consequences for prospective homebuyers. Rising interest rates often make it harder to qualify for a mortgage.

This is why.

Why do higher interest rates make it harder to get a loan?

The higher the interest rate, the more difficult it is to qualify for a loan. This is due to the lender’s limitation of higher monthly payments relative to income. Also, if interest rates rise, your monthly payments will increase.

Most lenders look at two key numbers when approving a loan and when setting interest rates. They are the front-end debt-to-income ratio and the back-end debt-to-income ratio. The first refers to housing costs relative to gross income.And the backend ratio is all Compare your debt (including housing costs) with your gross income.

Lenders generally apply the 28/36 rule with respect to these ratios. Housing costs such as mortgage interest, mortgage principal, taxes and insurance cannot exceed 28% of your income. Also, total debt including housing cannot exceed 36%. There are some exceptions, but you should stay below these numbers to get the best rates and maximize your chances of being approved.

However, as interest rates rise, monthly payments increase significantly, making it harder for buyers to follow the 28/36 rule required to qualify. For example, if he added $200 to his monthly payment, he might exceed his borrowing limit.

what can you do about it?

The most obvious solution to making sure you can afford a mortgage is to borrow less. If you take out a small loan, your monthly payments will be less. You pay less interest and less principal each month, so you can keep your debt-to-income ratio within an acceptable range, even with higher interest rates.

You can borrow less by buying a house that costs less, or by making a larger down payment and paying for much of the house with cash instead of a loan. Any of these options are great ways to keep higher interest rates from lowering the price of buying a home.

There are other options, such as looking into a mortgage that you may qualify for. For example, some government-backed loans tend to have a high debt-to-income ratio. Also, a variable rate mortgage may have a lower starting rate than a fixed rate loan, which may reduce your monthly payments to the amount you qualify for.

Unfortunately, government-backed loans tend to have higher fees and ARMs are riskier loans. If you’re having a hard time buying a home, you may be tempted to consider these solutions, but even if you have to wait to buy a home or look for a cheaper property, look them up. Best to avoid. Get fixed rate loans that are easy to buy.