The Housing Scene by Lew Sichelman

Don’t Bite Off Too Much House

Only your lender can tell you how much you can spend on a house. But you don’t have to spend that much, and probably shouldn’t. You need some wiggle room -- especially if you’re a first-time buyer.

Broker Steve Godzyk in Manchester, New Hampshire, recently had a client who didn’t heed that warning, and she’s likely to be sorry. A single mother of two, she told Godzyk that after paying the house note, she’s left with no money to have fun or go anywhere with the kids.

During the house-hunt, she’d insisted on searching at the top price her lender said she qualified for. When Godzyk asked why she wouldn’t buy in a lower price range so she would have money left over after paying her mortgage, she replied, “The loan officer said I can buy a home at that price, and I will.”

Being “house poor” is no fun, and it doesn’t take long for a dream house to become a nightmare. And Godzyk’s client appears to be far from alone in shooting for the moon.

A new report from mortgage analytics firm Black Knight found that 1% of all loans taken out in last year’s first quarter were delinquent within six months. Sure, 1% doesn’t sound like a lot in the greater scheme of things, but that’s the most since 2010 -- and an increase of more than 60% over the past two years.

Here’s more proof some buyers are biting off more than they can chew: In another recent study, Clever Real Estate, a site that matches buyers with agents, found that 35% of mortgage complaints submitted to the Consumer Financial Protection Bureau in 2018 were from people who were struggling to pay their mortgages, suggesting they were overextended.

It’s even happening in the rental sector, according to Zumper, a leasing platform, which says a third of all millennials spend more than 30% of their incomes -- the standard measure of affordability -- on rent.

Lenders base their decisions about the maximum they will lend on several factors. Credit scores are key, but they also give heavy credence to your debt-to-income ratio, or DTI, which is calculated by dividing your total monthly debt expenses -- like vehicle, credit card and student loan payments -- by your gross monthly income.

Generally, lenders won’t approve mortgages for people who spend more than 43% of their income on recurring monthly payments. But that cutoff “is hardly a steadfast rule,” says Clever Real Estate research analyst Francesca Ortegren, who found that 15% of the loans written in 2018 were to borrowers above that ceiling.

Indeed, Middletown, Connecticut, mortgage broker George Souto says some conventional lenders will go up to 50%, while those pushing government-backed FHA financing will go as high as 55%.

Don’t go that high, though. Why? If you add the cost of your new mortgage to your monthly debt load, it leaves little or nothing for utilities, maintenance, food, gas, clothing, school supplies and all those other things you spend money on, month in and month out -- items your lender doesn’t pay any attention to when calculating your DTI.

“This is an insane way to go into homeownership,” Lise Howe of Keller Williams Capital Properties in Washington, D.C., warned recently on the ActiveRain real estate site. “A lender may approve you for a mortgage at a high amount, but it might not make good financial sense to borrow all that money.”

To avoid debt overload, start by picking your realty agent carefully. Your lender, too. You want to deal with professionals who have your best interests at heart, not their own.

“There are agents who will test your discipline,” says Barbara Todaro of RE/MAX Executive Realty in Franklin, Massachusetts. “If your pre-approval reflects a large number, they’ll start their showings with that luxury home, and everything else will look like a fix-and-flip.”

New Lenox, Illinois, mortgage broker Gene Mundt agrees. “A good lender fulfills a larger role than someone who facilitates a mortgage,” he advises.

Another good step is to prepare two budgets: one so you know exactly what you are spending now, and the other so you’ll know what you will be paying once you buy a house. That way, you won’t be giving your lender the power to determine how much you can spend on your house.

Some items will shift, of course. If you are paying renter’s insurance now, for example, you can forget that number -- but make sure you include an amount for homeowner’s coverage in the second budget. It’s required, as is mortgage insurance. Some of these costs can be included as part of your monthly house payment, but they add substantially to an amount above and beyond principal and interest.

Make sure you include everything, from your cable and internet bills to your cellphone. And allow amounts for food, entertainment, transportation and whatever else you can think of. Later, if you decide to lower some of these expenses or dump them entirely, you can. But at least you’ll know going in what you have going out.

Making these lists will take some time, but it’s well worth it. Budgeting allows borrowers to determine their own fates, advises Ortegren. It’s “a simple way to avoid overspending,” she says.