I this last market it wasn't unusual for buyers to tell me they were qualified for a home that was well beyond what they could comfortably afford. My next question was geared towards getting them to think realistically about those monthly payments and was something along the line of, "So you can afford to eat every other day?" We all know how that shook out and are now facing unprecedented challenges in our economy.
This brings up the idea of housing affordability and reminded me of the movie Back to the Future. Word on the street is the banking industry is starting to revert to the old 28/36 rule when qualifying consumers for home loans. This tried and true method allows up to 28% of your income to be spent towards housing and caps all debt at 36% to include the PITI, insurance, car payments, credit card debt, etc. Given some statistics showing that up to 12% of all Americans spend up to half their gross income on housing costs it's no wonder the banks are tightening their belts.
Financial advisers all agree that you need to outline your life style and figure out your living expenses prior to shopping for a home. The magical thinking of re-financing out of a too high housing loan into a more affordable traditional 30 year fixed has back-fired and caused a lot of pain. So do the hard work of sitting down and itemizing every necessary expense vs. those that vary from month to month. Should finances get cut you can eliminate that expense and apply the funds towards your mortgage.
Down payments, taxes and reserves are the main elements lenders look at when determining how much house you can afford to purchase. Traditionally 20% down showed the banks you had skin in the game and they rewarded consumers with preferred rates and no additional mortgage insurance. FHA and VA offers buyers the ability to get into home ownership without the big down payment but with the added expense of mortgage insurance. These costs are fixed and most new homeowners set up an impound account to collect these funds on a monthly basis. When the tax bill or homeowner insurance bill comes due the funds are ready to be dispersed from the impound account making the process painless.
Home ownership is the American dream and after we get through the nightmare created by the creative financing of the past six year perhaps we will embrace the fundamentals we were taught with higher regard. Being house poor isn't much fun but living beyond your means creates stress so don't disrespect the numbers. If you would like to know the difference between your rent vs what you could purchase let me know. Now is a perfect time to buy with interest rates AND prices down so let me know if it's time to go shopping.
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