How To Be A Responsible Home Buyer

14 03 2011

The number one reason for home foreclosures in the United States is a simple one: homeowners took out mortgages that they simply could not afford. It is true that in many cases, the lenders did not do much to prevent these doomed-to-fail loans, and in many instances encouraged them. Ultimately, it is the responsibility of the home buyer to know if they can afford a loan that is offered to them. That said; let us take a look at how critical it is to respect how much you can actually, truly afford.

How Much You Can Borrow is Different from How Much You Can Afford

A mortgage lender will use a standard calculation to determine how much he is willing to lend you. He will gather from your application, information about your income, debts, credit and available down payment. By calculating what is called a debt-to-income ratio, your lender will determine how much he can safely (an extremely subjective term) lend you.

However, you must know the following about the lender’s calculation:

* Only recurring debt is included, such as home equity loans, car payments, minimum credit card payments, student loans, furniture store loans, alimony, child support, etc.

* Other miscellaneous debts and obligations such as informal personal loans are not included

* Other household and living expenses are not considered

* Expenses associated with your personal life style are not considered

* Future financial demands and plans with regards to career and family are not considered

* The ratio is based on your gross income, not after-tax income

As you can see, with the many debts and obligations that are excluded in the lender’s calculation, the amount of money he or she can offer will most likely be higher than you would have thought it to be. This is where the trouble begins for many home buyers.

Awaken the Responsible Home Buyer Within

By the nature of the many debts and obligations excluded from the debt-to-income ratio, it should be obvious that the lender’s number simply isn’t going to work for you. This is where personal responsibility comes into play. Do not ignore the discrepancy between the lender’s numbers and what you can truly afford. And don’t be discouraged. This is your reality; embrace it and adjust. Look a little harder for a suitable home that fits your budget or perhaps rent until you remove other debts or save for a larger down payment. Do whatever it takes to avoid becoming house poor or worse yet, foreclosing on your new home.

When to Do Your Own Calculations

You can see the importance of running your own numbers before you talk with a lender. Walk into a lender’s office telling them what you can afford and what you are comfortable paying.

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