It’s good to know that in these tough economic times, when thousands if not millions of people can no longer afford their home, the banks are still willing to lend insane gobs of money to the people they deem worthy…
Ugh.
Last night Jose and I met with a mortgage broker, not to actually put together any paperwork for a pre-approval or a loan, but just to get a lot of questions answered and put together a few scenarios detailing our options for a first-time home purchase. In response to the mortgage crisis, banks have raised the minimum credit score they require for certain types of loans. No surprise, right?
Fortunately, I have a pretty good credit score. In fact, I have a high enough credit score that I could get a loan for the price range in which we intend to buy — on my income alone.
Of course, I would never buy a house in this price range on my income alone because the monthly mortgage+tax+insurance (i.e. housing money) is 50% of my monthly net income. That’s far higher than the 30-35% that most financial budget-planning experts advise, and higher still than what I’m paying right now. And while I could afford to spend that much if I truly wanted to, the rest of my life would take a pretty big hit in terms of eating out, activities, and travel.
Basically, banks are willing to lend me a very large sum of money that, while technically affordable, is not really in my best interest. And this is to say nothing of my future plans. What if I lose my job? (Fortunately mine is quite stable.) What if I get seriously ill? What if I change careers? The potential of me changing careers and taking a significant pay cut is very real, but mortgage companies seem to just look at a single data point — what is my income and credit history at this very point in time — to make a decision on whether they should loan me money that will be paid back over 30 years. That’s a long time. A lot can happen financially, both good and bad, in 30 years.
I am smart and reasonable, and so I can take all this into account when I run the numbers to figure out what Jose and I can afford. (And we are fortunate to be in a position where it’s really not whether we can afford a nice house as much as it’s what we want to spend.)
Nevertheless, it’s very easy, even now, to see how a lot of people could quickly get in over their heads with huge mortgage payments that they can’t support.
All that said, our meeting with the mortgage broker was excellent. He answered all of our questions and put together a few different financing options. We left feeling much more educated about the home-buying process, which was exactly our goal in the first place.
And that is a good thing.
It is crazy, isn’t it? We were approved for more than 2x what we actually spent. We actually laughed when they told us the amount.
Yeah it’s amazing to me how many people don’t/didn’t consider all that when they bought above their means. I guess it’s all about the education. I don’t know how it would fit in school curriculum, but I think personal financial education should be part of a junior high/high school education.
I guess I don’t buy that the banks have to look out for you. They make a deal with you – you put some money down, and they let you live in a house until you’ve paid for it. If you pay it off, it’s yours. If you don’t, it’s theirs. They have a responsibility to tell you how much you need to pay each month and to explain how that amount might change over time, in my opinion. Beyond, that, it’s not that complicated.
If they’re willing to lend more than you consider reasonable, it’s because your credit score indicates you’re a responsible person who would pay off that higher amount if needed. It’s kind of ironic that responsible people don’t usually choose to buy what they’re allowed.
My lender actually didn’t approve me for that much more than I could afford. They asked me how much I wanted to spend, then said, OK, we can approve you for that. When I decided to spend a bit more, they gave me a new letter.
Hey Sarah, I have to agree with Jennifer. The bank lends based on what you make now, and there’s no way to know if you’ll make less money in 5 years or get sick or any of that. How would you feel if you couldn’t borrow enough because the bank thought you might not be able to pay in 5 years? A good credit score tells the bank you’re likely to consider those possibilities before borrowing the money but ultimately it’s up to you to make the payments after you take the loan.
Too many people didn’t take that into account in the past or were misled by crooked brokers, thus the current problems with mortgages.
I guess in short the bank can’t lend on what may or may not happen in 5 or 10 years, they have to go off what they know, basically your current situation with income, etc.
A final point, as long as house prices go up you can refinance if you get underwater on the mortgage, but when house prices drop and you have no equity, you’re in trouble. Too many people counted on their house value going up indefinitely so weren’t worried about 5 or 10 years down the road, they could always refinance.
I agree with Brian. The problem is that people aren’t taught about being financially responsible. I have a feeling a lot of folks would say that this is a job for parents. However, as many adults aren’t able to keep their own finances under control, how do we expect them to teach their kids to do better?
It would be an incredibly useful addition to the school curriculum. It could even be taught as part of math classes. The actual math involved in personal mortgages isn’t even that tough.
Joel and I had the same thing happen when we were buying. I had started my job the very day we put a bid on the house, so I didn’t even have paystubs to show them! And they offered to lend us $600,000! It was crazy – but then again it was back before things crashed so it was during the crazier time. I just remember being amazed and wondering how anyone would think that would be reasonable for two people who just started their current jobs in the past month!
It’s good that you and I know the amounts were out of control, but I think most people didn’t. I agree that people need to take responsibility, but the bank should not offer a loan would require a payment of 40-50% of the take-home pay. That is just asking to fail, and now many of those loans are the ones in trouble. Sigh.
And I WISH I could build a house for that out here! Seattle is way expensive…. 🙁
Remember that the mortgage broker makes his/her money on the front end of the deal and the more you borrow, the more he/she makes. They have to encourage you to take more for them to make more.
The number one cause of personal bankruptcy is catastrophic illness. Even with good health insurance, serious illness almost certainly will lead to financial difficulty and perhaps bankruptcy. But it would do the same if you didn’t own a house.
Historically, houses don’t go down in value very often. I think today’s downturn is no more than a blip. It might be a five year blip, but you can wait it out. Sticks and bricks and labor are needed to build and they cost whatever they cost. Over supply drives prices down, but over supplies do not last for very long. Then prices go up.
i am trying to buy a house too. i feel your pains!