Why Considering the Cost of a Mortgage and Expenses is Important

    Before jumping into buying a home, every potential buyer should consider the cost of a mortgage combined with the living expenses they already have each month. It may sound simple, but it is something a potential homeowner can forget when they get ready to buy a home. That is why experts say potential buyers should consider how much mortgage their “lifestyle” can actually afford.

    “Don’t become ‘house poor,’ meaning don’t spend so much money on a monthly mortgage payment that you have no extra money to do anything else,” said Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan. Foguth writes and teaches about real estate.

    “A borrower needs to have a sense of their overall budget and, in particular, how much they spend each month paying off loans — student loans, car loans, credit card bills,” Foguth said. “Once your monthly debt load creeps up to 40 percent of your monthly income, you need to ask whether you are taking on too much debt to comfortably handle the necessities of life — shelter, food, clothing, etc.”

    Diane Honeycutt, with Team Honeycutt, said “homebuyers need to be aware of their expenses but also consider that they may actually be able to afford more of a home than they first think.”

    For instance, maybe a family looks to pay $850 a month, trying to find a $100,000 home, but can’t find anything they like, but if they see they could spend $1,000 a month, they could get a home in the $120,000 range that is closer to what they are looking for.

    “Maybe we are looking at a $150,000 to $200,000 home and you are not finding what you are wanting and you are depressed and you go in and find out you can afford $250,000 very comfortably and that $250,000 gives you what you are looking for, then you’ve wasted the time looking at $150,000 to $200,000 homes and missed out on the house of your dreams,” Honeycutt said. “So talk to a lender early on to say, ‘What can I afford?’ And they’ll tell you.”

    The federal Consumer Financial Protection Bureau uses a 43 percent debt-to-income ratio as a line between sustainable and unsustainable credit. The Consumer Financial Protection Bureau found that those with higher debt-to-income ratios are significantly more likely to fall behind on their debt payments. It will also be much harder to get a mortgage if your debt-to-income ratio exceeds 43 percent because of the Qualified Mortgage and Ability to Repay rules that govern most of the mortgage market.

    “Consider only spending a maximum of 30 to 40 percent of your monthly expenses on a mortgage,” Foguth said. “Remember, if you have the same mortgage payment for 30 years, the more you make in your career the more emergency and retirement savings you can build.”

    Foguth added potential homebuyers should also consider those new expenses that come with owning a home that they may not think to factor into their budget when planning to buy a home. There are a lot of major appliance that can add up quickly, plus the cost of the upkeep of a home, from landscaping to updates on the inside of the home.

    Andrew Penner, with Total Mortgage Service in Connecticut, said those are all factors a homebuyer needs to consider before getting a loan.

    “We always have to remind our borrowers that the loan amount they get approved for isn’t always the amount they should spend,” Penner said. “It’s the industry standard to base the approved loan amount on a borrower’s current debt and income, but there’s no way for us to take into account things like child care costs, utilities, food costs, travel expenses, and so on. By maxing out their loan without doing their own math first, borrowers run the risk of ending up house poor and financially overextended.”

    Bottom Line

    The Housing Affordability Index is in great shape and should not be seen as a challenge to the real estate market’s continued recovery.

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