I probably should have picked "untwist" for a handle, because I seem to spend most of my time trying to unwind the spin. Consequently, I barely knew what to do with myself then when I read this San Antonio Express News article by Jennifer Hiller entitled "The perfect mortgage?" After reading articles like "The Zen of Leverage" I was stunned to read in an MSM publication where they actually suggested NOT BUYING MORE HOUSE THAN YOU CAN AFFORD [and by this it is assumed they are referring to "mortgage" not "total price"]:
While some people want to buy the most expensive house they can, it’s not usually a good idea.
"Just because you can doesn’t mean you should," said Jim Gaines, research economist at the Real Estate Center at Texas A&M University. "There are a number of people who end up buying houses and get into trouble."
His advice: "Don’t buy the maximum house you can buy."
Not only did Hiller find sensible advice from Gaines, but from another source as well:
Frank Dunn of Genesis Mortgage said people should figure out ahead of time how much they can afford, and not let a builder, real estate agent or loan officer convince them they can swing a much higher mortgage.
"They try to get you to buy more home than you really want," Dunn said. "I tell people, ‘Don’t do it.’"
Dunn said it’s common for people to get talked into buying more than they originally wanted, especially when it comes to choosing upgrades on a new home.
"The buyers will get in there and if they can afford a $120,000 house, they (salespeople) will find a way to get them up to $140,000 or $150,000." [Oh that they stopped at $150K!]
So how do you know how much you can afford to spend?
The Real Estate Center created a formula for home buyers. The math is simple. Multiply your income by 2.52.
That’s the most you should spend on a house.
Chances are, you won’t be dazzled by the amount.
That’s the point, Gaines said.
"The market will dictate the maximum you can afford, and after that it’s up to how you manage your money," Gaines said.
And there’s more sensible advice as well:
Rene Palacios, a housing loan officer with the city of San Antonio, said the first question hopeful home buyers have is how can they fix credit problems.
The second is this: "How much can I get," Palacios said.
"A lot of mortgage companies are providing too much money," he said. "I tell people to get something you can feel comfortable with. If you get approved at $1,200 a month but $800 is more comfortable, stick with $800. Don’t buy the pie in the sky."
Thomas, of Harbor Financial Mortgage, has a fast formula to make sure you can safely afford a particular home: For every $10,000 you want to finance, plan on $100 toward the monthly payment.
(A $100,000 mortgage would cost $1,000 a month, including taxes and insurance.)
He advises not driving up to or touring homes that have an asking price that would take you past your monthly payment comfort level.
"If you have to rob Peter to pay Paul, or if Aunt Suzy has to move in with you, it’s probably not a good idea," he said. "You don’t want to have to change your life too much. Don’t become married to that house."
What’s a blogger to do if the MSM is going to dish out straight, reasonable information? It’s a good thing the Existing Home Sales numbers are due out today- I can always count on David Lereah to keep me busy.
[Hat tip to Patrick for this find from his subscription list]
It’s not often I find someone MORE conservative than me!
My personal metric is 3x income. For every primary residence I’ve owned, I’ve stepped into conforming mortgages just under 3x income and had no problems making payments.
I’m thinking that perhaps there should be one multiplier for single (me), one for married and one for married with children?
The last two groups surely face more unexpected emergencies and expenses that can impact payments. And they’re also less mobile when the job market changes.
Anyway, it’s refreshing to see someone making common sense suggestions, instead of gulling the naive with potentially dangerous “buy as much as you can afford” advice.
NVMike-
When my husband and I bought our first house, I remember hearing the rule of thumb was 1/3 of your income if you had very little other debt, and 1/4 on your income if you had more in the way of ccards etc. We were already in the parent business, so we figured we had better allow for two kids- the bank wasn’t going to.
I loved the attitude shift in this article. It’s true that if you aren’t moving any time soon and your payments are well within your reach, you don’t need to obsess about how great an investment this is. People know their car isn’t that hot an investment, but they drive it to use it.
When supply is tight, you can expect to pay more for a product. Well supply isn’t tight right now. The great thing for those of us who track inventory, we know that puts downward pressure on the prices. If more people adopt the attitude of buying what they can afford, buyers aren’t going to jump in the market in any significant number, until prices make sense for them economically.
Here’s a fun link to play with it again brings up the affordability issue with today’s prices and wages in Arizona and elsewhere..
http://money.cnn.com/popups/2006/moneymag/25_rules/3.html
I heartily remember that current buyers who are doing the crash and burn type mortgages are averaging 3.6 times income due to the neg am and interest only aspect those crash and burns/higher debt ratios allowed. Can anyone substantiate what the real multiplier is right now?
I heartily remember that current buyers who are doing the crash and burn type mortgages are averaging 3.6 times income due to the neg am and interest only aspect those crash and burns/higher debt ratios allowed. Can anyone substantiate what the real multiplier is right now?
I can’t substantiate the ratio but I can add that a major problem is that so many of these buyers are leaping in with no savings at all, while living check to check.
That’s why they go no money down and with option ARMs.
They have no $ available for repairs, maintenance, next year’s property taxes or unexpected financial crises.
They’re walking a fine line between homeowners and next year’s foreclosure victims.
Statistically, many of them will stumble and miss payments. And once you fall behind while treading water living check to check, it’s almost impossible to recover.
Here’s a fun link to play with it again brings up the affordability issue with today’s prices and wages in Arizona and elsewhere..
http://money.cnn.com/popups/2006/moneymag/25_rules/3.html
For (using arbitrary ballpark #s) $100K annual income, with $60K down payment (and $0 debt, 6% int. rate) that calculator claims a buyer can afford a mortgage between $333,847 (conservative) and $403,344 (aggressive).
That’s 3.3x to 4x annual income.
That seems very high to me.
NVmike
That is a bit high if you read the advise on the left you can see they recommend you don’t spend more than 21/2 times you earnings. I believe the calculator is the standard that the underwriters will allow actually they will allow anything these days however back when you had to qualify that’s what they used.
But even using those high ratios the normal wage earner in Arizona would have a hard time qualifying for a $150,000 mortgage.
That’s the reason we see so many suicide loans used today
I met a young woman this weekend from Lake Forest CA. She grossed $101k for 2006 and is quite proud of it as she is only 27 years old. Her new home, purchased four months ago for $730k puts her at 7 times income! Correct is 2.5, absurd is 3.6, who wrote this thing at 7 times income?
Ducksface-
Unfortunately she has lots of company. Supposedly these exotic mortgages helped make homes more affordable for buyers- hogwash. Without them, builders and sellers would have been forced to set prices where people could actually afford them. If lenders were to stick to more conservative ratios, prices would drop like a rock- they would have to.