Mortgage Loan Affordability Issues that Homebuyers Need to Consider

 

Lenders can and will qualify you for a variety of loan programs and amounts.  However, you  need to personally consider whether the mortgage loans you’re approved for meets your own affordability requirements.

This chapter two sides of the affordability analysis:

• Lender Affordability Analysis. How the lender looks at your ability.
• Personal Consideration. Affordability questions you need to ask yourself.

The question of how big of a mortgage loan (and purchase price) you can afford is both a business and person issue.

Your mortgage lender’s loan officer and underwriter may tell you that you are qualified for a loan amount of 200,000, for example. However, when you discover that your housing payments will more than double with that size of a loan, you may have second thoughts about the specific purchase price, loan amount or loan program you want to shoulder.

Lender’s Affordability Analysis

For most lenders, the question of affordability comes down to income qualification, particularly with relation to debt burden and projected housing expenses.  With conforming loan programs, the lender must calculate and analyze two debt-to-income (DTI) ratios: the projected housing expenses ratio and the total long-term debt ratio.

The rule of thumb for most lenders is that your total mortgage payments, including your property taxes and insurance premiums, should be less than one-third (1/3) of your gross monthly income. Different mortgage lenders and loan programs may set their requirements tighter or looser than this, but this guideline has a basis in reality.

For most Americans, housing expenses do typically account for 25% to 33% of their gross income. Higher DTI ratios mean that borrowers will have less money available for other expenses and would be at higher risk of default… especially if faced with an emergency.

The “Prequalifying Yourself for a Mortgage Loan” chapter goes into further detail about income qualification.

Personal Considerations

Regardless of the guidelines outlined above, the final consideration of affordability rests with the borrower.

• Short-term goals. When discussing issues of affordability, you must consider your projected housing payments against all your other near-term goals.  If the purchase of a yacht or a year-long “walkabout” sabbatical is in the near future, then you may want to minimize your projected housing expenses as much as possible.
• Long-term plans. Parallel to short-term goals are long-term plans.  Where do you plan to be in 15, 20 or 30 years?  If you don’t plan to be in this house for more than a decade, then it might be a wiser investment decision to go with a less expensive home―that will allow you to save up for your dream home.
• Emergency contingencies. A common consideration for two-income families is whether they can afford the housing payments if one of them were laid off or unable to work.  What is the likelihood of that happening? Insurance and an adequate savings plan can cover some issues, but not all.

As discussed in other sections, it is important to consider the home purchase as an investment—as well as a dream.  As an investment, the home purchase must be considered alongside all other investments you have planned, especially those investments that will affect you emotionally, spiritually and otherwise.

Some buyer remorse is always to be expected with most home purchases, especially those first few times you issue the check for your mortgage payments.  However, by giving these considerations of affordability some thought early in the homebuying process, you will minimize the effect and even the emergence of subsequent buyer remorse.

Yes, your attitudes, goals, plans and decision may change.  But planning and forethought will allow you to make changes to your situation with less pain and hassles.