Personal finance experts warn about biting off more than you can comfortably chew.

By Pamela Yip
THE DALLAS MORNING NEWS
Sunday, April 29, 2007

Buying a home is as much an emotional decision as it is a financial one. So, it can be exciting to learn from a lender that you qualify for a big mortgage. But how much you qualify for and what you can afford might be two different things, and home buyers are often enamored of the former when they should be paying more attention to the latter. "There are the numbers, and then there's common sense," said Craig Jarrell, president of the Dallas region of Pulaski Mortgage Co. In other words, a lender might say you qualify for a $300,000 mortgage (which pays the lender a hefty fee), but only you can decide whether you can afford it.

"A lot of the people who are now encountering difficulty in keeping up with their mortgage payment didn't conduct a similar assessment when they were borrowing the money," said Greg McBride, senior financial analyst at Bankrate.com, a personal-finance Web site. "There has been oftentimes a big difference in the past couple of years between the amount the lender may approve you to borrow and the amount you can reasonably expect to repay, particularly if interest rates rise." Lenders are in business to profit from loans, so they have incentive to get you into the biggest mortgage they can. You, on the other hand, have an obligation to yourself not to overstretch and buy too much house.

Follow the standards Although they might not be discussed as much as they used to be, the old rules of thumb still hold:

"Twenty-eight percent of your gross monthly income should be the maximum that you devote to your monthly mortgage payment, including property taxes and insurance, and mortgage insurance," McBride said. "No more than 36 percent of your gross monthly income should go for all of your debt payments," which include the mortgage, car loans, student loans and credit cards.

"Borrowers have an obligation to themselves to find out how much they can afford and let that dictate the type of home or the price of the home that they purchase," McBride said. "At the end of the day, the borrower is the one who's on the hook for the payments, so you want to make sure that you can make those payments month in and month out, rain or shine," he said. Besides the principal and interest of the mortgage payment, you also must consider property taxes and homeowners insurance — and mortgage insurance if your downpayment is less than 20 percent of the home price. As a homeowner, you'll also have utilities and maintenance costs. You might have homeowner association dues. "The typical person out there spends a third of their gross monthly income on a house payment," Jarrell said. "That's a good rule of thumb." "I make $10,000 a month, have good credit, I want to buy a $300,000 house, and my house payment is going to be $3,000 a month," he said. "At first glance, you say that works because that's only 30 percent," $3,000 divided by $10,000, of the monthly income. Then you discover that the would-be home buyer has $3,000 in other debts, such as credit cards, to pay each month. Now, the total debt-to-income ratio is 60 percent, or the $6,000 in debts divided by the $10,000 income, Jarrell said. In that case, "I'd have to cut them back to about a $200,000 house instead of a $300,000 house."

Look at what you owe

Consumer debt is the killer for many wannabe homebuyers. "A lot of people can afford a house payment on paper, but if you add all their other debts, they can't afford anything because they owe too much," Jarrell said. So, look at your total financial picture. Do you have enough savings to cover your debts if you lose your job or can't work? "What's your real monthly budget like?" Jarrell said. "You have other expenses that might not show up in the typical analysis, like medical bills, tuition, caring for a parent; your kid is getting ready to go to college. How much are you saving for retirement?" If you're applying for a mortgage based on your income and your spouse's income, look ahead. "Are you both going to work the rest of your lives?" Jarrell said. "What are your family goals, what are your working goals?"

Think about this: "This is your largest financial investment of your life," Jarrell said. "Are you thinking about your total financial picture, not just how you can max out on your house payment short-term?"