I had an experience I was planning to share and after writing about Student Loans and Your First Mortgage, today is the day to do it. In that article, I wrote that a couple earning $100K could afford a house worth as much as $465K if they had a 20% down payment saved up. I actually think this is on the high side, but given how low rates are today, the numbers work.
If you’ve not read the article earlier this week, I used two ratios, 28% of monthly income to go towards housing cost, and 36% to total debt servicing. This is how responsible banks qualified borrowers before the mid-2000 bubble that nearly destroyed the economy.
On a personal note, I am taking the state mandated 40 hour class that will let me sit for the real estate salesperson exam. (Note – the word Realtor is trademarked, one has to have the license to become a Realtor, but not all real estate agents are Realtors.) That said, the class is offered over 4 consecutive Saturdays, a long day, 10 hours of stuff we’ll never use after taking the test. We were honored to have a guest speaker join us, a Mortgage Broker who talked a bit about her business. When she got to the qualifying ratios, it wasn’t 28/36, but 43/50. To compare to my numbers from the prior article, 43% is just about 1.5 times 28%, so this broker is saying this couple can borrow not the $372K I calculated, but rather, $558K. She was also pushing loans with as little as 3% down.
She was quick to point out that Real Estate Agents are not supposed to offer financial advice to clients, and that since she knew more than everyone in the room, we should just send our customers her way. (She literally said, “I know more about mortgages than any of you.” I decided it would be pointless to challenge her. We all just wanted her to leave so we could get through the material.) It’s interesting for me to see that these mortgages are even available, the bubble and crash aren’t even 10 years behind us. I can understand the downpayment is tough, and if a buyer with good income can qualify for a mortgage with a decent debt to income ratio, that’s fine. But the thought of selling someone a mortgage that will put their debt service to 50% of their gross income should be criminal, in my opinion.
I’ll leave you with one final thought. Say this $100K couple gets in too deep, and for 30 years skips the 401(k) matched deposit of 5%. $10K each year for 30 years will grow to $1.1 million at an 8% rate of return. I know, it’s not that simple, but when people get in too deep, something has to give. Would you be comfortable if the Mortgage Broker told you not to worry about having half your gross pay going to service your debt? I don’t think I’ll ever refer anyone her way.