Smart Moves by Ellen James Martin

How to Get a Mortgage Without Breaking the Bank

With mortgage rates hovering near historic lows, many real estate specialists worry that homebuyers could be tempted to overspend. They fear their clients could be at risk financially if they overshoot their budget and then face a job change, a marital breakup or another unforeseen event.

"It's always good to be a little on the conservative side when taking out a mortgage," says Joseph Schiro, a real estate broker who has sold property since 1993.

"I always tell clients that before they choose a property they should run the numbers and make sure they stay skinny on their overhead," says Dale Robyn Siegel, a home loan broker and author of "The New Rules for Mortgages."

"Before making any major financial decision, your first task is to ensure you'll have the funds to meet your (core living expenses) every month. Otherwise, your stress level and quality of life could be greatly impaired," Siegel says.

How should you go about determining your core living expenses, known in the industry as your "nut"? Arlen Olberding, a certified financial planner, urges would-be purchasers to take a step-by-step approach. As a first step, he says you should carefully review your checking and credit card statements to see where your money has gone during the past six to 12 months.

Once you've categorized your past spending, it's time to comb through the columns, determining which among your non-mandatory costs you'd be willing to trim to afford the sort of house you wish to purchase.

"In creating a spending plan, you need to think both about your necessary expenses and lifestyle choices, like an urge to travel," says Olberding, who specializes in helping middle-income clients meet their money goals.

Once you've calculated your living costs, along with quality-of-life choices you consider essential, it's time to compare this monthly total to the net income you're bringing in. The difference should be the funds available to cover your mortgage expenses and future home upkeep and utility costs.

Here are a few pointers for homebuyers:

-- Disabuse yourself of the notion that lenders know what you can afford.

After the financial crisis of 2008, mortgage lending standards became very stringent and they remain so, Siegel says. This tightening is making it much harder to gain lender approval -- particularly for people who are self-employed or lack a track record of job stability.

Yet ironically, Siegel says many who can jump over lender approval hurdles are still able to borrow more than they reasonably should. Why? Because the full extent of their living costs isn't apparent to the lender who reviews their file.

For example, in assessing your affordability range, a lender won't take into account private debts. Nor would the lender know you've signed a contract guaranteeing your tuition payments to the private school your child attends.

"If an expense doesn't show up on your credit report, the bank doesn't know about it," Siegel says.

Because a lending institution has limited information on your living costs, she says it's critically important you do your own pre-purchase computation to determine the realistic scope of your monthly nut.

-- Include inflation in your cost-of-living calculations.

Although the government's Consumer Price Index has shown relatively little movement in recent months, inflation is still a major factor for many households. Especially hard-hit are families with young children who face hefty day care costs and those who've opted for private schooling after their kids reach kindergarten.

Then there's the soaring expense of higher education.

Along with education expenses, health care costs have risen dramatically, led by the cost of employee contributions to health plans and the premiums paid for the kind of individual policies used by those who have no access to insurance coverage through work.

Even core energy expenses that are normally immune from big price swings, like utility bills and food costs, can rise unpredictably. In assessing their future living costs, Olberding advises clients to factor in average price increases of as much as 5 percent per year for their core expenses.

"No one is immune from inflationary increases. So it's always better to err on the high side when you're preparing a spending plan," he says.

-- Factor savings into your financial calculations.

If possible, Olberding recommends that adults of all ages strive to contribute to their retirement savings each year a sum equal to 15 percent of their gross income. And he urges that this outlay be classified as a core expense when deciding how much they can afford to cover their housing payments.

"Savings should be one of those core costs you don't forget when figuring out how big a mortgage you can handle safely. Buying your dream house is great, but you want to do so without breaking your budget," Olberding says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)