How Much House Can You Really Afford?

Whether we want to admit it or not, the house we live in says something about our character. Because vanity is one of our strongest temptations, it's easy to succumb to the desire for more than we can safely afford when buying a house.

If you're buying a house for investment purposes, this article is not for you. If you're looking for a home to live in, read on. You'll find a solid perspective on affordable housing.

First, a caution. When you talk with a lender about buying a home, the chances are great the lender will offer to loan you a whole lot more money than you can reasonably afford. Why? Because most lenders now make money up front when they broker a home loan and then they will pass your loan to investors.

In the past, your local banker was someone you probably knew. And when you borrowed money from a community bank to purchase a home the banker was careful to lend you only what you could afford … even if you wanted more. This wasn’t necessarily because the banker had your best interest at heart. Rather, the local banker knew his or her bank would lose money if you couldn’t afford your payments and the bank was required to foreclose on the home.

In the last decade, however, the mortgage lending world has changed. Mortgage brokers sell the home loan and pass the mortgage to financial institutions that package your loan with many others into mortgage-backed securities. The chances are good that within a few weeks of closing, your local bank will be out from under the loan and you'll receive paperwork from a the new mortgage loan servicer.

Now, if you’ve paid any attention to the main stream media recently, you've heard the gig is up on many mortgage backed security instruments. In some regions of the country, the real estate market is in a tailspin for home owners who need to sell. The pendulum has swung towards the buyer’s side of the equation in many areas of the country.

Against this national background of crazy lending which allowed home buyers to borrow so much more than they can safely afford, how can someone know how much money they can safely borrow to buy a home?

First, smile when a lender tells you how very much you qualify to borrow. It feels good to hear it. Next, ignore that number. That’s probably crazy lending speaking and the number may be way too high for you to comfortably, safely afford.

What you’re really interested in is not what you may be "qualified" to borrow. You really want to know what you can safely afford to borrow. And this is where you need to be very honest with yourself. Vanity will tempt you to buy more than you need and more than you can afford. Give careful thought to the concepts of need and affordability.

You don't "need" to impress anyone. You need affordability because life is uncertain.

Suppose you’re married and both of you are employed. Should you use both salaries in your mortgage qualification? Only if you’re sure both of you will continue to be employed. If one of you becomes disabled or decides to stay home with children, your family income will be reduced significantly. If that happens, you’ll be happy if you qualified for a mortgage using only one of your incomes.

The sad online joke on some real estate blogs is about the new home owner who eats instant noodles and sits on the floor because they bought more home than they can afford. In addition to your monthly mortgage payment, you'll want enough money left over each month for food, clothing, medical care, transportation, entertainment, charity; you get the idea.

One of the 16 calculators in Real Estate Calculator Suite is the Mortgage Qualifier. It was designed with a conservative approach to housing affordability. The Mortgage Qualifier uses loan underwriting standards that worked well for borrowers before the recent period of crazy lending. Because of this approach, the Mortgage Qualifier provides a good starting point to help you determine the maximum monthly payment and loan amount for which you qualify under safe underwriting guidelines.

What are safe underwriting guidelines? Bankers once commonly used two ratios to determine what a home buyer could afford, the housing ratio (usually set at 28%) and the debt ratio (which was typically set at 36%).

The housing ratio determines a borrower's maximum monthly housing expenditure and includes the total housing payment: principal, interest, taxes, insurance, private mortgage insurance and homeowners association fees.

In addition, bankers once looked closely at the qualifying debt ratio which determines a borrower's maximum month debt expenditure. Lenders once loaned money with the knowledge that a borrower's entire monthly income cannot safely go towards the mortgage and debt payments. Home buyers must also have money left over each month for food, utilities, transportation, healthcare, savings, education, and fun!

Mortgage Qualifier in Real Estate Calculator Suite

If you want a good way to find out what you can safely afford, try the Mortgage Qualifier in Real Estate Calculator Suite. Compared to crazy lending, Real Estate Calculator Suite offers a proven, more conservative perspective on buying a home. It focuses on helping you determine how much home you can safely afford now and in the future.

A fully functional trial version of Real Estate Calculator Suite is available from http://www.wheatworks.com/real-estate-calculator.htm

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