Smart Moves by Ellen James Martin


It's a scenario that still happens, despite the sobering realities of the real estate market in recent years. A lender tells homebuyers they're entitled to borrow more than they expected. Good news? Not necessarily.

Keith Gumbinger, a vice president with HSH Associates, a mortgage-publishing firm, says that even now, with stringent lending standards, some homebuyers can borrow more than is prudent.

Sean Sebold, a veteran financial planner, says, "There are lots of reasons to be conservative on how much you spend for a house. One factor is that if you overbuy and can't afford it, you'll be hit with major transaction costs to sell your home and buy a smaller one."

Among the homebuyers who should be especially careful not to overspend are people who are single and couples supporting a household on just one income, he says.

How is it possible to borrow more than you should for a home purchase?

The explanation is that lenders don't know everything about their borrowers' living costs. For example, homebuyers seeking a mortgage needn't disclose that they face high costs for their toddlers' day care or that they're helping cover a mother's nursing home bills.

"The lender is blind to everything but the income and liabilities on your record," says Sebold, who's affiliated with the National Association of Personal Financial Advisors.

"The problem is most people don't actually reduce their spending the way they expected to after moving to their new house. They keep spending as much as ever on restaurant meals, travel and expensive hobbies," he says.

Why do homebuyers continue to spend more than planned -- even after taking on a big mortgage? Sebold believes most Americans are inherently optimistic about their finances.

"Despite the current economy, the majority of people think they'll be making more money in the future," he says.

Here are a few pointers for homebuyers:

-- Watch out for mortgage brokers who push hard for business.

In the aftermath of the country's mortgage debacle, the home-loan industry has gone through a major restructuring process. One result has been tighter regulation of mortgage-lending practices. Another has been a dramatic decline in the number of mortgage brokers --intermediaries who originate loans for banks and other lending institutions.

Although there are fewer people working in mortgage lending, those still in the field are now competing as aggressively as ever for loans, Gumbinger says, and many work on commission, meaning they don't get paid unless their deals go through.

Do lenders want homebuyers to borrow more than they should relative to their financial situation? Generally not, says Gumbinger, but neither are they driven to dissuade borrowers from doing so.

"It's not the mortgage lender's responsibility to protect you from you," he says.

-- Get a grip on your finances prior to taking out a mortgage.

Sebold suggests that before looking at property, you do a careful analysis of your income and expenses to ensure you'll have adequate funds to cover your housing and lifestyle costs.

Because reducing your expenses could be even harder than reducing your weight, Sebold advises that the best way to determine how much you can afford for housing is to analyze your spending over a recent three-month period. Then assume you'll spend as much or more after you buy a home, adding in extra costs for the property, such as hardware and lawn supplies.

In fact, Sebold encourages renters to simulate what they would confront if they faced higher housing costs each month.

"Suppose you're now paying $1,500 a month for rent but plan to spend $2,500 for a house payment. While still living in your apartment, put an extra $1,000 a month in a savings account and see if you can live on the rest of your income," he says.

-- Set an upper limit on how much you'll spend for a home.

Are you working in a field with high levels of unemployment? If so, Sebold says you should keep regular contributions to savings in mind when calculating how much you can afford to put into housing.

"If you're working in an insecure job, you'd better have a year's worth of living costs set aside if you're in a one-income household," he says.

Even if you have two incomes, and believe your jobs are secure, Sebold says you'll want to add in a financial buffer when calculating what you can afford for housing.

After gaining mortgage pre-approval, he urges you to set a firm upper limit on how much you'll spend before heading out to look at property. Put this number on an index card and carry it in your pocket when you're searching for the right home, he says.

"You should always know that number before going out to buy," he says.

-- Don't let the vision of the perfect property for your kids sway you.

Sebold says many parents of young children fantasize about the ideal place for them to grow up -- with many bedrooms, a huge family room and a large, fenced yard where the kids can frolic along with the family pets. This is a fine vision if you can afford it. But he cautions that such an ideal has the potential to cause some parents to overspend, with good intentions but unfortunate results.

Sebold says that staying within your budgetary limits is ultimately in the best interest of everyone in the family, including the kids.

"You don't want your children to have the perfect house when they're very young only to have it taken away before they reach their teens," he says.

(To contact Ellen James Martin, email her at