Be realistic about what you can afford

Discussion: In my opinion, most banks will lend you more than you can afford and most rent to own sellers will put you in contracts which are beyond your means. How can you know in advance what you can afford, before you start the process? It’s really quite simple. Be conservative. Remember, I just told you that most parties will lend you more than you can afford. So what can you afford? Banks look at your income in two buckets: Housing, and all other debt. Housing costs include mortgage expenses, real estate expenses and insurance or association dues expenses. To be conservative, I recommend that a person spend no more than 25% of gross income, on housing expenses, and have a total debt picture of not more than 35% of gross housing expenses. The figures are before taxes. Let’s look at an example. If a family makes $6000 per month in gross income, they should be able to comfortably manage $1500 in total housing costs, with about $600 per month in other fixed bills including credit cards and car payments. Now the trick is that banks and lenders mix before tax dollars with after tax dollars. If you make $6000 per month, you are likely only taking home about $4500 to $4700 per month. So if you have $2100 in housing expenses and fixed bills, that leaves you with about $2300 for all other bills. Utilities may be up to $500 per month for gas and electric and telephone. Automobile insurance doesn’t show up on the credit report as a fixed expense but is usually at least $50 per month. Clothing, food, school expenses, gas and all other expenses must now be funded from the remaining $1500 to $1800 that’s left. Maintenance on the home is expensive. Lawn maintenance, painting, fixes, new appliances and other household expenses add up quickly. In my experience, a person making $6000 per month thinks they can realistically afford a $200,000 home, because that’s what the mortgage broker tells him. But with these expenses, a home of $150,000 would be more realistic. Sure, someone will get you a loan for $200,000, but then you’ll really be struggling to pay all your bills and will put yourself in a possible foreclosure situation. Because ultimately, people pay for food and gas before they pay their mortgage. Finally, there are many “stated” income mortgages. These mortgage products do not require verification of income to get the loan. If you’re reading this document, you most likely are challenged to get a loan, or a loan that you can afford. Ask yourself this question. If I cannot prove to the bank that I have the income to support a mortgage, can I realistically generate the income to support that mortgage payment? If you are self employed and truly have a reliable income stream, the answer may be “yes.” If you get paid a salary or wages with a traditional W2 form, then the answer is probably “no.”