Smart Moves by Ellen James Martin

Tips to Avoid Taking Out a Too-High Mortgage

Young adults across America are facing an unprecedented array of expenses. These include payments on mountains of student debt and hefty health care costs. Many with small kids also face exorbitant daycare charges.

So, should millennials try mightily to limit their mortgage expenses when buying a home -- even if that means settling for a smaller-than-ideal property? Absolutely, if they intend to stay in their place for a relatively short time, says Issi Romem, the chief economist for Trulia, which tracks real estate markets throughout America.

“It’s not a good idea to overextend yourself if you’ll need to sell within three to five years,” says Romem, who’s based in one of the nation’s costliest housing markets, the San Francisco area.

Romem is already identifying signs of a mild to moderate downturn in real estate markets and a slowing of home price appreciation. That means those currently buying property can’t count on price gains to cover their selling-related expenses if they must let go of their property a few years after buying it.

The good news for current buyers is that the market is gradually shifting in their favor, and mortgage rates are likely to remain moderate by historical standards. Meanwhile, unsold inventory is starting to accumulate, which means many sellers will need to cut prices, giving buyers more bargaining power than they’ve had in recent years.

The slowing in home price appreciation, coupled with the high cost of living for many millennials, makes it prudent for first-time buyers to limit their exposure to mortgage debt, says Keith Gumbinger, a vice president at HSH Associates, which follows home lending trends across the country.

“It’s better for buyers to err on the side of safety than to be up to their necks in financial obligations,” he says.

Here are a few pointers for buyers:

-- Realize it’s still possible to take out a bigger home loan than you should.

“It’s always possible to put yourself behind the eight ball with mortgage debt,” Gumbinger says.

Many borrowers are offered the chance to take out a larger mortgage than is wise in their case, says Sean Sebold, a veteran financial planner who’s advised clients since 1994.

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

Why do some buyers spend more than planned -- even after taking on a big mortgage? Sebold believes most buyers are optimistic about their finances.

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

Do lenders want buyers to borrow more than is prudent? 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 handle 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 outflows to ensure you’ll have adequate funds to cover both your mortgage payments and your non-housing expenses.

Do you have a child who needs expensive tutoring due to learning disabilities? Are you a dog lover who insists on organic food for your several puppies? Do you like traveling the world and take regular international trips?

These are examples of special spending patterns that should be taken into account when deciding how much you can afford for a property.

Sebold recommends that before you shop for a home, you should 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.

-- Give yourself an upper limit on how much you’ll spend for a home.

“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,” Sebold 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 preapproval, 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.

(To contact Ellen James Martin, email her at