How Much Can I Afford / A Stupid Question

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How Much Can I Afford / A Stupid Question

You've reached that point in your life, somewhere between 18 and death, that you want a home of your own. You locate a REALTOR® or better yet a Loan Originator and make your first mistake. You ask "how much can I afford?"

This is possibly the second most asked question in real estate, the first is "what's the rate?" How would your REALTOR® or Loan Originator know what you can afford? The Loan Originator can determine what you qualify for, but that has little relevance to what you can afford!

As you read about the mortgage crisis keep in mind except for the minority involving fraud each of those home owners had qualified for the loan! Qualifying and affording are not the same! Often not even close!
Only you, the potential home buyer can decided what you can afford. If your current rent is say $1,350.00 and you pay all the utilities you can probably afford close to that $1,350 each month. But, as the home owner you will now have to deal with maintenance expenses that the current owner takes care of. If each month you are able to save another $1,000.00 you might be able to afford as much as $2,350.00 per month.

If on the other you ask your REALTOR® or Loan Originator what do I qualify for, they will look at your gross income and apply a factor dictated by the loan program of 28%, 33%, 45%, 50%, or more. This may mean that you can get the loan, it doesn't mean that you can afford to make the payments.

Before you ask anyone anything, ask yourselves, what can I afford? Start with your current rent, then determine what additional income you could add to it. Are you saving money each month? Do you have long term bills being paid off? Are you getting a raise? Is there something your willing to give up that would save money? Are you really willing to give up anything?

Now that you've come up with your own number you need to ask yourself the questions no professional legally can. Do you really want to buy a home with someone you're not married to? Are you going to stay married? Mortgages are for 15, 30 or even 40 years, relationships are from now until the next argument, marriages sadly often are not much longer. How would you make the payments if one of you moved out? What if by plan or happenstance one of you should get pregnant? Would you be able to make the payments during and after pregnancy?

Now is the time to talk to the loan pro, and ask the proper question. "We can afford $2,500.00 per month principal and interest (the loan payment) taxes and insurance, what's the best program we qualify for and how much can we buy with our down payment and a new loan?

Your Loan Originator can't legally deny you any loan you qualify for, don't blame them if you can't afford the monthly payment! Don't blame your REALTOR® they legally must sell you any home you want and can afford. Only you can decided what you can afford!

Bill

William J Archambault Jr

The Real Estate Investment Institute

Bill

William J Archambault Jr

The Real Estate Investment Institute

wja@reii.org Cell 832-259-7078, Houston 832-582-8415, Las vegas 702-516-1569

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From my past: GRI 1975, FLI 1974, Catalyst from a client 1974 an agent that makes things happen, REII, The Real Estate Investment Institute 1995.

©William J Archambault Jr ©The Real Estate Investment Institute ©REII

Posted by William J Archambault Jr on 02/16/2008 10:33 AM

Comments (38)

mortgage, qualifying, affording, reii, william j archambault jr, the real estate investment institute

Originally posted at: The Real Estate Sage at The Real Estate Investment Institute - REII: How Much Can I Afford / A Stupid Question

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Post is included in group: The Ninety-ninth Percentile

38 Comments on How Much Can I Afford / A Stupid Question

FEB

2008

Good information William.

One of the first things I speak with serious first time home buyers about is the difference between what they think they can "afford" and what they "qualify" to buy.

The first is often not realistic and the second is often surprising.

Thanks Lenn,

I agree, It's a rare consumer that can translate monthly payments into loan amounts and purchase prices.

Bill

Good advice Bill. I counsel folks to start saving now the difference between their current payment and what home ownership will cost them. If they can do this for a year then they have achieved two things. They know they can afford the payment and they have manged to save some money for a down payment.

After the preliminary "get-to-know-you" rapport building dialogue.....here are the next 3 questions I ask every home purchase client.

1) What do you feel comfortable paying monthly for the home you want to buy?

2) What are you paying monthly in housing expense now?

3) What amount have you set aside to use for down-payment and closing costs?

The answers to these questions are where every loan officer should start. It's my job to get the client to the "How much can I afford" ANSWER on their own. By guiding the conversation we can discover together what will be affordable. The really dumb question in my opinion is "How much do we qualify for?"

I got asked that once, and my answer was that if they asked that question of most sales people, they are going to get the highest commission charged them because that question could be re-asked as, "What makes you the sales person the most money?"

Great advice Bryan,

I'vw always done the exact same thing. It's never surprised me how many couldn't do it. The excuses were very entertaining! As if there would be any surprise expenses once they're a become owner.

The problem is most never remember what you advised. And you can't refuse them if they're qualified. Then of course you sold them to much house and the lender forced them to make too big a payment.

Bill

Ken,

I knew you'd do it right.

"I got asked that once, and my answer was that if they asked that question of most sales people, they are going to get the highest commission charged them because that question could be re-asked as, "What makes you the sales person the most money?"" So sad! So often true! I always tried to teach, the most profitable loan is one that closes and gets you referrals from both the buyer and REALTOR. Only the stupid think the amount of any one commission is important!

Bill

That may be true, but my first career was in the restaurant business. I remember talking to some of my waiters one night and them telling this story. A customer asked wether the waiter preferred the NY Strip or the Chicken Santa Fe. Now let's see......

NY Strip = $24.99 and Chicken Santa Fe = 9.99.....and as a waiter they are paid $2.15 per hour so basically their pay is commission. The waiter's response?

"Oh I have to say sir that our NY Strip is the finest selection of any steakhouse in town. You can't possibly be disappointed with that as your choice. And may I suggest a really nice Claret to go with your steak sir?"

One thing to keep in mind and I believe it applies here as well. There was absolutely nothing wrong with the NY Strip and it was an excellent choice. So was the Chicken Santa Fe. But if you are asking the waiter to choose between two excellent choices, why....again keeping in mind they are paid commission as a waiter....why would he ever recommend the chicken? If you don't know what you want and both are fine choices then don't blame the waiter for suggesting the more expensive one. Translation.....if you don't know what kind of house you want, why shouldn't the real estate agent show you the nicest, most expensive one? It's ultimately your responsiblity as a consumer to determine affordability.

Our job as mortgage professionals is to help you identify HOW to do that if you are not certain yourself. We have more training in that area or at least more familiarity with people's personal financial situations.

FEB

2008

Ken,

I'm not sure the restaurant analogy applies. If I'd ask that waiter I have tipped according to the value of his advice, he'd of been glad for the $2.15.

I've been a major consumer of restaurant services, even owned one for a few months. I'd have suggested to that waiter the he respond "Sir, at $24.95 our NY Strip is the best in the house, I love it! But, for only $9.99 you can't beat the Chicken Santa Fe it's excellent. My tip would have depended upon the service and weather or not I liked the food. Maybe the waiter should have ask "Sir, do you prefer Chicken or Beef?

I've always believed that a home buyer should buy the biggest most expensive home he can afford, because he'll be happier with it longer.

Some where I seemed to have miss-communicated, my concern is here is not with the the purchase price or loan amount but the monthly payment! Many if not most people can qualify for allot bigger monthly payment than they can comfortably afford! The pro's can tell you what you're qualified for but not what you can comfortably afford.

I've tipped $10 to $20 for a $1,50 cup of coffee with great service, and $0.03 to $3.00 on a $100 meal with bad service. We don't tip real estate professionals we send them referrals, again for service. Up selling for the salesman's sake may make for individually larger commission, but life never gets any easer, take care of your client and let them sell you to the next guy!

Bill

good stuff.

when i started in the mortgage business i lived in souteastern NH. we had pease afb and the portsmouth shipyard. i was a little scared to tell the VA guys what they would qualify for because the system was so liberal. i would have a discussion with them about the areas you mentioned.

two to three years ago all the buyers looked like this as, programs would qualfy them for almost anything.

think about it 50%, or more, of the gross, not the net.

yikes!

yikes, indeed!

50% of gross is scary, but it works some! Most people can't afford it, but many do qualify.

I don't want to lose the tool, simply because it's unsuitable for most. My point is the difference between what a person can afford and what he can get.

Thanks for commenting.

Bill

When Melissa and I bought all of our residences (we are on #3) we asked ourselves what we were comfortable paying . It was a lot lower than we could qualify for. Amazingly we have a savings account, nice furniture in every room and college for our 6 year old daughter is about paid for. I'd bet most of our neighbors are not that lucky. Granted the slow time in the real estate business has eaten into the savings though. If I'd paid bought what I could qualify for we'd be screwed. Some people, however, never learn. I guess I have the added benefit of working in the bankruptcy industry for most of my professional life. That teaches people a lot about money.

Excellent advise Bill... many of our first time home buyers lose sight of things when they go from objective decision making to subjective... "have to have this house"

Rick

Rich

You make my point and you make me proud!There is allot of good hidden in that evil facade.

There was a time when the Qualifying ratios were so restrictive that your reach coulldn't exceed your grasp, then things improved. But, like all changes we've had people that just couldn't handle it. My point is buy only what you're comfortable with!

Bill

Thanks Rick

Bill

Bill.... this is excellent.... I haven't see anyone ever talk about this and I am shooting myself for not thinking of it. Why do I say that? Within the first 2 minutes, to break the ice, I ask the client, what do they want to pay/can afford... and don't tell me zero... lol I usually, 8 out of 10 times, get a chuckle from this. So I know I ask this all of the time, but just never thought about writing about it.

On another note... you know what has me ticked off... and I semi blame it on the consumer, but for the most part, the loan officer. When a client is shopping for a loan and I asked them... what was the other lender's rate... sometimes they don't know. But here is the part that kills me... when I ask them, well, what is your payment. AH... I don't know... ... Me?? you have to be kidding.. but then again, I could see some of these loan officers being so quick on their feet, that buying real estate can be an emotional thing at times, that they get the clients mind off of a payment... just telling them what they qualify for.

Anyhow... good post...

FEB

2008

Jeff,

Thank you!

All to many of our colleagues think their lending expertise means they know more about the client than the client. These people are in the mortgage or real estate business, what a sad frustrating life they lead. Continued success, referrals, personal satisfaction and higher income come to those of us in the people business!

When I hear that a client has talked to another lender I ask for the "Good Faith and Truth in Lending" forms. People hear what they want to here, if you ask is that loan fixed? All to often they say yes, because th other LO said it was fixed, for two years. It's nescerry to compare apples to apples! What bothers me the most is that 7 out of 10 don't have or weren't given the "GF and T in L"

Bill

William, good point on "Do you really want to buy a home with someone you're not married to? ", sometimes even the one they are married to if things are not going well in the household.

A personal budget is a great first step as well.

Thanks, Duane.

Remember if you're in real estate or lending you can't legally ask those questions!

Bill

Bill..... not only not having the GFE as you mentioned, but never told the rate or payment. I had one gentleman tell me that he had a very good rate. I kept asking him what the rate was. Then asked for the GFE.... he said he didn't know the actual rate or had the GFE.. I then went ..."AH".... I bet the lender said that they are giving you a really good rate. LOL

After I answered Duane, I found a note from him telling me his firm offer a free budget computer.

I don't know Duane, I've never heard of his business or anything like it. But any one polite enough to avoid posting a strange link on my blog, can't be all bad!

You might want to check it out.

http://www.rateahome.com/Forms/MonthlyBudgetCalculator.aspx

Caveat Emtror.

Bill

Bill, well thank you. You are to kind. Just thought it may help the clients.

Carpe Diem,

Duane

Jeff,

"I lost another one... the one line clerk never quoted a rate or closing cost. They just keep repeating over and over their program was better! At closing the loan was 1% and 1.5 points higher than my proper written disclosures! Even worse rates had gone down. Maybe that's why I haven't seen their adds in a long time and their huge car division just posted it's biggiest lost ever?

Bill

Duane

You're welcome.

Bill

FEB

2008

Bill A, I didn't see any mention of escallating income (what are they going to be making five years from now?) and the savings on income tax in your calculations. I'm one that believes that they should "pressure" themselves a little in the first few years because, as you said, they will be happy longer. They will also build their net worth faster. This is what neg am loans are for, or pay option. BTW not all pay options are ARMs, some are fixed rate.

So in the final analysis it really is about what they qualify for.

Bill Roberts

I actually expected this post to go somewhere else. But it's a great post! You hit the nail on the head about what people can afford. I don't think too many buyers look at things that way. Good info.

Bill R,

I also didn't mentioned marring off their 18 year old daughter and letting someone else feed her. There are allot of thing I didn't mention. My point was that the consumer should decided for themself what they can afford.

As a loan originator, as a counselor, as an educator, I would certainly ask about escalating income, but this post was directed to the consumer. Only the consumer can determine what he can afford. The professional's job is different than the consumer's responsibility to their self. Our job is to provide options and understanding, then to qualify and finance them.

Like you I too believe most consumers should buy the biggest most expensive home they can afford, for they'll be happier longer. It will also build net worth faster. My concern is that they don't confuse qualifying with affording.

In my final analysis it really is about what they can afford! Almost all those former home owners that lost their homes to foreclouse qualifed for the loan.

Bill

Joseph,

I don't know where you though I was going, but I'm glad you enjoyed the trip.

Thank You,

Bill

FEB

2008

Bill, They (the consumer) shouldn't be asked to make this decision until and unless they've had the benefit of your counsel. And the eighteen year old daughter is a material fact in this equation. Maybe she'll be going to an expensive private college!

Bill Roberts

Bill R,

I think we are in nearly total agreement. I said: "Our job is to provide options and understanding, then to qualify and finance them."

My use of "afford" maybe to esoteric, maybe I need to be more pedantic like a friend of mine.

Bill

FEB

2008

I usually ask what monthly budget are you comfortable with and then next have you spoken with a lender to see what kind of mortgage you qualify for. I've never asked about "escalating" income before; however, that's another question I may add. Thank you for such an enlightening post... anyone that has you as counsel is one lucky person.

Thank you for a realistic post dealing with very relevant questions. Too many buyers realize too late that what they can qualify for is not always what they can afford each month for the next 30 years.

Norma,

You're welcome.

Bill

MAR

2008

Jan,

Thank You.

Sorry I missed this.

Bill

MAR

2008

I have had the good fortune to work with many buyers who don't feel comfortable obtaining the loan they "qualify" for. It is nice when they understand their own finances and know what they are comfortable paying. I always encourage them to stick to that price, even if the bank qualifies them for more.

Robin,

Your clients are very lucky! Agents that think more of their clients intrest than their personal pocketbook are worth their weight in gold.

Bill

I recordered and posted it as a Pod-cast.

here is the link: 3/25/2008 3:16 PM

Bill

MAR

2008

Hi William, this is a great post and an excellent conversation. I picked up some pointers. Thanks.

Wayne,

Thank you!

Bill

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William J Archambault Jr

Houston, TX

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Address: The Real Estate Investment Institute, 448 W. 19TH St. Suite 245, Houston, TX, 77008

Office Phone: (702) 516-1569

Cell Phone: (832) 259-7078

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