Housing Affordability and Mortgage Prequalification

I always say to first-time home buyers, "there are two numbers when it comes to determining how much of a mortgage you can afford; one is the monthly payment that the mortgage industry thinks you can afford, and the other, which is the more important one, is what you think you can afford.

It wouldn't have surprised you five years ago days if I said that the number the industry comes up with is far higher than what most people are comfortable with, but it may surprise you that even in today's world of so called conservative lending, that this number, called DTI  ratio (debt to income ratio), is still very aggressive.  The industry, more specifically Fannie Mae, and The Federal Housing Administration FHA allow debt to income ratios of anywhere from 28%-45% of your gross monthly income.  A DTI is determined by taking a percentage of your gross monthly income.  For example, a family earning $10,000 per month can afford a DTI of 28%-45% of their gross monthly income, or a$2,800 to $4,500 per month to dedicate towards their monthly housing expense (mortgage payment, homeowner's insurance, real estate taxes, and flood or mortgage insurance, if applicable).

More often than not, even when quoting in the lower range of DTI ratio, the prospective home-buyer will tell me that they aren't comfortable with a payment that high.  What I tell people is that every one's lifestyle is different, meaning that some people live modestly and might be able to afford a higher mortgage payment, while others may like to buy expensive cars, go out to dinner or take frequent vacations.  Other factors are future expenses such as college, or wedding.  Certainly empty nesters can allocate more funds towards a mortgage than a family of six kids.  Other factors are how far along you might be with investing for retirement.  I try to review these important issues when pre-qualifying a home-buyer. 

Generally speaking, I'd prefer to see a DTI ratio of 25%.  At the end of the day, you need to determine for yours and your family's financial security what a comfortable housing payment is.  There are two things I strongly encourage prospective home-buyers to do; the first is to sit down and complete a family budget.  This will give you a clear picture of where your money is going, how you might reduce your living expenses, and how much cash-flow is available to increase your present living expense.  The second is once you've determined how much you can afford, immediately start putting the difference between your current living expense and the proposed payment into a savings account.  This will get you used to paying the higher amount before you commit to purchasing a home and will blunt the effect of payment shock.

I welcome the opportunity to answer any questions related to qualifying for a mortgage. Feel free to email me anytime at gdevine@atlantichomeloans.com, or call me at 401 301 0130. You may visit my web site at http://www.bankyourloan.com/gdevine

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