Best loan is one that’s comfortable to pay

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More than a decade ago, lenders used tried-and-true debt-to-income ratios to determine the maximum amount a potential home buyer could borrow. With the proliferation of loan programs and the introduction of automatic underwriting programs, which evaluate a variety of factors to estimate a potential borrower’s ability to repay, traditional ratios have faded in importance.

Most consumers know to meet with a lender before searching for a home in order to be prequalified for a mortgage, but not everyone realizes that the loan amount for which he or she qualifies should not necessarily be the loan he or she chooses.

As mortgage default rates climb around the country, wise consumers should be sure to evaluate all their financial circumstances before deciding how much to spend on a home.

“It’s easy to let a house purchase drive your financial plan, but it should be the other way around,” says Greg Smith, a certified financial planner with the Wise Investor Group in Reston.

Mr. Smith is heard on WMAL-AM (630) on Sunday mornings from 8 to 10 a.m.

He says consumers should make sure they can afford to continue to save for their retirement rather than rely on their home as their only investment.

A financial plan gives consumers the context in which to determine how much they should pay for their home.

“Remember the motivation of who you are talking with when you meet with a lender,” Mr. Smith says. “The lender wants you to use up every penny of what you are qualified for because their mission is to get buyers into a loan. It takes a wide-angle lens to look at the entirety of your financial situation.”

Mark Atherton, a certified financial planner with Ticknor, Atherton & Associates in Reston, says determining how much to spend on a home is complicated by the many personal circumstances that go into the decision.

“Deciding how large a mortgage to take on is based on an individual’s risk tolerance, just like any other investment,” Mr. Atherton says. “Consumers need to think about the stability of their jobs, and they need to plan for potential changes such as a growing family or a disability.”

Mr. Atherton says some financial planners have advised clients to build wealth over the past half century by moving from one home into a more expensive one and then into another more expensive home, rolling the equity from each home into the next.

Other financial planners suggest that a more balanced portfolio relies on a diversity of investments, including a home that does not consume the majority of the household income.

Jason Klein, president of City Line Mortgage LLC in Bethesda, says that qualifying for a loan depends on the borrowers’ assets, credit scores and debt-to-income ratios but that the ratios have become less of a factor now that so many loan products are available.

“When I prequalify someone for a loan, I suggest several different scenarios of monthly payments depending on the loan program, but I also ask if they are comfortable with those monthly payments,” Mr. Klein says.

Mr. Klein says he makes certain that his borrowers understand that housing costs are not simply the mortgage principal and interest payments, but that they also include taxes, insurance and condominium or homeowner association fees.

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