For 'comfort level' of loan, don't rely on the lender



You've just walked out of your mortgage lender's office all smiles. After all, the lender says that your income -- coupled with low mortgage rates -- allows you to qualify for a house far grander than you ever dreamed possible.

But in the middle of the night you're awakened by a strange question:

On what basis could the lender say you can dish out $1,200 a month for housing when he never even inquired about your seven kids, steep private school tuition bills or your annual pledge to the church?

"A lender can only tell you the size of the payments you're qualified to carry. He can't tell you what you're comfortable with," cautions John Lloyd, Lutherville branch manager for Sears Mortgage.

At the minimum, he'll demand to know your income as well as monthly payments on credit cards, store charges, car loans and other debts, as well as mortgages on other property. And he'll require you to disclose any child support or alimony obligations.

He won't inquire about above-average outlays for child care, medical care, college tuition or the support of an elderly parent. He won't have a clue as to whether your lifestyle calls for lavish expenditures for clothes, restaurants or vacation travel. And he couldn't possibly know that you're on the verge of an income-cutting venture such as a leave of absence for the expected birth of a child.

Why does the mortgage system ask so little about individual obligations? Because the system doesn't care about you as an individual. What's likely is that -- within weeks of being made -- your mortgage will be bundled with other like loans and sold to investors in the form of mortgage-backed securities. And these anonymous investors make their bets based on statistical averages on payment capacity -- not on the life stories of the borrowers.


Here are pointers for those wondering whether they should go to the hilt on a house payment:

* Check out your housing finance plans with an accountant or other impartial third party.

All to often, real estate experts say, prospective homebuyers forget what motivates a lender. The loan officer is motivated to make you a loan by a potential commission from his firm. And the bigger the loan, the bigger the commission. Obviously, the real estate agent is similarly motivated. Lenders and agents are not in a position to offer an objective answer to the question: "How big a mortgage should I take?"

Mr. Lloyd suggests engaging an accountant, who can also help you understand the tax implications of your mortgage choice.

A financial planner may also be a good choice for impartial advice, though some planners -- especially those who make their living on the basis of commissions for the sale of investment products rather than fees -- tend to favor stocks, bonds and insurance products over real estate since they have nothing to gain when a client makes a home purchase, real estate experts caution.

4 * Take into account your extraordinary expenses.

Lenders work off standard "ratios" that determine how much a homebuyer can borrow.

The "front ratio" -- generally 28 percent on a conventional-type loan -- is the supposed maximum percentage of your monthly gross income that could go toward your monthly housing payments. Those payments include your mortgage principal and interest, as well as property taxes and home insurance costs. (It also could include your mortgage insurance payment if you take a home loan that requires such insurance. And it could include any condominium fees.)

The "back ratio" -- generally 36 percent -- is the supposed maximum percentage of your monthly gross income that could go toward your housing payment plus your other major obligations. Among the debts counted in this category are car loans, consumer installment loans, credit card debts and student loan payments.

In lumping borrowers together, Mr. Lloyd reminds, extraordinary expenses are not taken into account. An analysis of your finances -- whether done on your kitchen table or at an accountant's office -- should include out-of-the-ordinary costs particular to your household. These could range from exotic prescription costs to day care bills to private school tuition.

When doing your financial analysis, think about your future as well as current requirements.

Under federal anti-discrimination law, a lender is barred from asking a female loan applicant whether she is pregnant. But if a home pregnancy test says you're expecting, and you plan to quit your job to care for the baby, you obviously should factor this into your financing decision.

* Be cautious about making a big leap in your housing payment.

Are you hauling in big money in your career as a medical equipment salesman? Yet, have you nevertheless been getting by comfortably with minimal rent payments on a one-bedroom garden apartment?

"Do you go out to dinner and the movies more than the national norm? Do you enjoy the flexibility of jumping on the airplane and taking a quick vacation? Have you been buying a new car every other year? Then maybe you should have a philosophical discussion about the needs of the family vs. the wants of the family," suggests David Ginsburg, president of Loantech, a mortgage consulting company based in Gaithersburg.

"Just because you can qualify for X-dollars doesn't mean you're going to be emotionally comfortable with that," he says.


(Ellen James Martin is a columnist for The Sun.)

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