MISTAKE # 2: Letting Qualifying Ratios Get Out of Hand

[smilingmeng]

MISTAKE # 2: Letting Qualifying Ratios Get Out of Hand

"The old rules don't apply anymore." We've heard these words so often that it is about to make us crazy. We heard them during the stock market run-up of the 1990s, when stock prices had no connection with reality. We heard the words in 1999 and 2000, when businesses that had no reason for existing drew accolades and admiration from the business press and the American public. Strange
that it now looks as though the old rules--like proper valuation and smart business plans--DO apply.

Now we are hearing the same kind of nonsense when people speak about mortgage qualifying. "Oh, that's the way they USED to do it, but things are a lot different now. Mortgage lenders are much more flexible on how much you can afford."

True. But there are many homebuyers in very serious financial trouble now, so who was right? For years, you qualified for a mortgage based on some fairly well established ratios. Your total mortgage payment (including principal, interest,taxes and all insurances) should not total more than around 28% of your monthly gross income. Your total debt load, including the mortgage payment,as well as all other debts (car loans, personal loans, credit card payments and any other loans) should be no more than 36% of your total monthly gross income.

Many mortgage lenders have thrown those old ratios out the window, approving household debt ratios in excess of 50% of income. Let's be clear here: If over 50% of your income is going to debt service you will be forced to either live a very shallow life with little or no funds for saving, investment or enjoyment, or, worse, are headed for a financial disaster.

Want the financial aspect of your home owning experience to be as stress-free as possible?Do your best to adhere to the 28% and 36% ratios.See a qualifying ratio worksheet here: Mortgage Qualifying Ratio Worksheet

 

[smilingmeng]

Mistake 3 for mortgage

MISTAKE #3: Not Enough Downpayment

Want to really compound mistakes 1 and 2? Get the wrong mortgage (#1), have too heavy a debt load (#2) AND put little or nothing down. Not too long ago, a 20% downpayment was fairly normal when purchasing a home. In the last decade the average downpayment fell to 10% and recently, to even less. This has been a boon for home buyers, especially those purchasing their first home, but these lower (and, at times, nonexistent) downpayments carry with them some real potential downfalls.

As long as real estate values appreciate at the supercharged levels that have in the last couple of years (and virtually NO one thinks they will) there should be no problem for those buyers who have little or no downpayment should they want (or need) to sell.
Should housing values stagnate, though, or worse,go down, these buyers will not be able to sell their homes without paying for commissions, selling expenses and the like out of their own pocket. These expenses can total upwards of $10,000 on a $150,000 home for example. Still owe around $150,000? Those $10,000 in expenses will need to come out of your pocket.