Expenses lurking behind mortgage

A residential home loan application. More borrower information is being sought now than before the recent crash.
A residential home loan application. More borrower information is being sought now than before the recent crash. (Bloomberg)

Day-to-day living costs must be considered to see if a house being bought is one that the borrower can really afford.

Posted: March 03, 2014

A mortgage application's black-or-white questions typically don't cover the gray areas of a borrower's day-to-day living expenses.

Don't consider that a lucky break or a protection of your privacy, though. You need to include those outlays, market experts say, or you won't know whether you can really afford that house you want to buy.

What you qualify for and what you can realistically pay for could be the difference between smooth sailing and falling into arrears.

"I always recommend a real-life accountant. You must figure all of this out," said Chester County Realtor Jean Gross, of Keller Williams, a 30-year veteran of the business.

"Even with all the changes since the real estate market meltdown, we don't count a whole lot of stuff you pay for," said Megan Carr, director of business development for Allied Mortgage Group Inc. in Bala Cynwyd. "We don't count child care, private tuition, food, electric."

Daily lattes. Sit-down lunches. Impulse buys. Those things add up.

Realtors who lived through the sobering bust years 2008 to 2012 are unlikely to show more than a couple of homes to prospective buyers without getting them prequalified for a mortgage. And most Realtors won't do the paperwork themselves, turning clients over to someone like Carr or Kevin Berju.

"Realtors have learned to be careful about who they are taking out. They pay more attention to the financial details," said Berju, a senior loan consultant at Trident Mortgage in Center City.

Pre-2008, it took minutes to approve a mortgage, industry observers say. Now, federal regulators require that applicants produce more paperwork, such as tax documents that actually have been filed. Also, mortgage lenders must find the source of significant cash deposits made into an applicant's bank account that are not income-related.

Then, there is the prospective borrower's debt to consider. A lender determines what the borrower qualifies for based on his or her debt-to-income ratio - the debt part cannot be higher than 43 percent.

If you reach 43 percent but live a lifestyle that includes $200 visits to the hair salon, what happens between mortgage payments counts, said James Hope, a mortgage consultant who discusses the industry on his weekly program, Hope Matters, on WNTP-AM (990).

Sometimes, Gross said, even if clients can afford their current rent, "if they are making $60,000 and have more debt than 40 percent," she advises backing off on the mortgage on a $250,000 house.

Said Carr: "Having good credit is a given now; it doesn't give anyone bonus points. . . . There is no way around the rules anymore.

"We don't take your word for anything," she said. "I need evidence alimony is over, because there are people who have alimony forever, because it goes into debt ratio. There is a reason we ask for documentation."

Calculating affordability includes considering the future, as well. Hope cited a well-heeled client who was looking at $2 million houses; he and his wife had $800,000 in cash. Hope, who didn't want his client spending more than $10,000 a month, asked: Have you budgeted for this purchase?

The client's response: Why? We have money.

For transfer taxes, plus one year of real estate taxes, Hope said. And maybe a jumbo mortgage: If you have to borrow more than the $417,000 threshold, you'll need to put down 30 percent, not the conventional 20 percent.

Total so far: $750,000.

The lesson continued: You have two young children and one on the way. What about future tuition? Perhaps a vacation home?

In the end, the client bought a $1 million-plus house, spending just under $10,000 a month. "We went through the paces of [buying] a real expensive home," Hope said. "But they weren't the right fit."

Still, Berju noted, consultants must be careful with their questions, because they could be considered discriminatory. He prefers to ask: What would be your debt with and without the house? Are you OK with what's left?

"If it is uncomfortable, my job is to come with a different program," he said.

Or for the buyer to come up with a cheaper house.

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