- The Washington Times - Thursday, March 31, 2005

I receive several calls a week from first-time home buyers. Their first question is usually this: “How much of a loan can I qualify for?”

My reply usually is not what they expect. I tell him that banks are pretty much willing to lend you as much money as you want. They’re in the business to make loans, not to baby-sit.

They also are in the business to make money. It’s certainly not a bad thing. It’s part of the free-market system. However, I’m finding that too many first-time home buyers go to a bank to borrow as much money as the bank will lend them.

This is the wrong approach. Lenders have certain underwriting guidelines that vary greatly, depending upon the loan program. For example, if a first-time home buyer has enough money for a 10 percent down payment, good credit and a verifiable salary, he will qualify for a mortgage payment that’s roughly one-third of his gross monthly income. He also can expect to get the best rates available in the market.

Let’s say a family has an annual household income of $100,000 — $8,333 per month. In order for the borrower to qualify for the best rates, the mortgage payment shouldn’t exceed one-third of that, or $2,778 per month.

Most folks with a family wouldn’t want to pay more than one-third of their income toward their mortgage payment.

Let’s look at the numbers. After taxes, health care and retirement deductions, the monthly take-home pay might be considerably less — perhaps a 35 percent drop, to $5,416.

So the perfect buyer who gets the best rate can qualify for a mortgage payment of $2,778 when his take-home pay is $5,416. That leaves $2,638 for everything else.

In my experience, that’s not a whole lot of money to take care of the rest. There are car payments, credit card debt, utility bills and groceries, not to mention the cost of raising children. The list goes on.

Ironically, the same borrower can find a lender who’s willing to make a loan of perhaps $1 million.

Sure, the payment would exceed the borrower’s take-home pay. But the credit is good, so the lender is betting that the borrower will somehow make the payment, regardless. The borrower had better be prepared to pay a higher interest rate.

It’s not up to the bank to decide a borrower’s monthly budget. A responsible consumer must sit down, evaluate household expenses and determine a housing payment within the overall budget.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@

pmcmortgage.com).

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