It’s Tempting, But Think Twice Before Stretching Your Budget to Afford a Mortgage Loan

Mortgage rates today are so low that it feels like the time to buy a home may be now or never. Unfortunately, I’m not quite at the point in my life where I’m ready to take on a scary-huge loan. Will I be there soon? Well, let’s just say that according to my Mint.com account, I’m a mere seven years and 10 months behind on my down payment savings goal.

I’m sure many other young renters in my situation are asking themselves the same question: Could I stretch my budget just enough to buy a home? It’s a dangerous proposition considering the recent financial crisis, yet a highly intriguing one all the same.

So I asked a few mortgage experts for their advice regarding whether a potential first-time home buyer like myself should consider making a few dicey budget moves in order to get into a home while the gettin’s good.

How Much House Can I Afford, Really?

When determining how much money you can reasonably afford to set aside for mortgage loan payments, it’s best to follow the 28/36 rule, which refers to optimal debt-to-income (DTI) ratios.

The first number — 28 — specifies the maximum percentage of your gross monthly income (that’s before taxes are taken out) that should go toward housing costs. The second, and sometimes trickier number — 36 — is the maximum total percentage of your gross monthly income that should go toward all debt obligations; that includes your mortgage, plus any other lines of credit like student loans or credit cards.

So for example, if your monthly gross income totals $3,000, you should be able to comfortably allocate $840 (28 percent) toward the cost of financing a home. However, remember that total debt payments should not exceed 36 percent of your earnings, or $1,080.

These are just guidelines, of course, and it’s possible to have a higher debt-to-income ratio and still be approved for a loan. In fact, the Chief Loan Steward for VA Home Loan Centers, Philip D. Georgiades II, says the maximum DTI ratio for most VA and FHA mortgage products is 48%, while conventional loan product back-end ratios tend to be around 41-42%.

Then again, I have to believe that the 28/36 rule exists for a reason.

Bill Parker, a loan officer, also told me that available discretionary income often plays a large role in whether or not you’re approved. For example, “A debt-to-income ratio of 45% for someone making $3,000 a month leaves $1,650 for other necessities,” he illustrates. “That same DTI for someone making $10,000 a month leaves $5,500 of discretionary cash. To which borrower would you prefer to lend?”

That means you might be just fine with the idea of squeezing every last bit out of your available budget, but depending on how much money you make, lenders may not be quite as comfortable with the idea.

Don’t Forget the Extras

It’s easy to get caught up in the monthly payment when determining whether you can afford a mortgage, but that kind of tunnel vision can lead you to ignore other major costs associated with owning a home.

“In my practice what I’ve seen is the typical blunder of folks buying homes: Failure to include a phantom line item in their budgets for maintenance,” Teresa Dentino, CEO and Founder The Financial 411 tells me. In fact, she says this is one of the most common reasons why homeowners’ budgets fail. Not to mention, “Buying too much house without room for this contingency is what went wrong on a lot of buys that went sideways in the Great Recession.”

When you own your own home, you become financially responsible for just about everything, like that roof that will eventually need to be repaired, the water heater that will some day break down and all the appliances inside that will eventually have to be replaced. One major repair could turn a tight budget into a major financial emergency.

Low Mortgage Rates Aren’t Worth Giving Up Your Other Goals

Mortgage rates today are so darn attractive, but consider whether stretching to buy a home now is really worth giving up on all your other future goals.

Financial services manager, Sam Auerbach, says that when you’re determining whether a home purchase fits in your budget, it’s important to review your finances with a critical eye. He explains, “You should be saving for your retirement or at least be putting money aside as a habit.”

Ask yourself, after stretching your budget, would you still be able to put money aside for your retirement, your kids’ education or your annual vacation? “Don’t trade off all the things you value so you can own a home,” Auerbach warns. “Compromise is good, a financial diet isn’t…that’s a dangerous position to put yourself in.”

I definitely want to retire some day, not to mention go on a vacation or two. Those are goals that would definitely be compromised if I purchased a home before I really had the savings to do so comfortably.

A mortgage is probably the biggest financial commitment most of us will ever make, and after talking to the experts, I’m sure stretching to afford one just isn’t worth the gamble. I’ll buy some day, but when I’m ready.

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