- The Washington Times - Wednesday, April 11, 2007

Q:My husband and I have been renting for the last five years and have decided it’s time to buy. We met with a loan officer who took all our financial information and qualified us for a monthly payment for up to $4,500 per month. Since we have enough money for a 20 percent down payment, excellent credit, and no debt, he suggested we take an interest-only loan in the amount of $700,000 and look for a house in the $875,000 range.

We were shocked that a lender would actually qualify us for such a high payment. Our combined salary totals $120,000 and our monthly take-home pay isn’t a whole lot more than $4,500. Frankly, we would be scared to death of having a mortgage payment that high. I have always heard that it’s best to obtain the biggest mortgage you can get, but this seems ridiculous.

Are we wrongheaded in our thinking?

A: No. The loan officer is wrong in his approach. It has never made a lot of sense to me for a prospective home buyer to go out and obtain the biggest loan they can get, simply because a lender is willing to loan the money. Everyone’s financial situation and spending habits are different, as is the individual mortgage payment comfort level.

The loan officer is undoubtedly correct in that you can qualify for a $4,500 mortgage payment. This is equal to 45 percent of your gross monthly income. While this is certainly the upper end, based upon your income, most lenders would approve this so-called “debt-to-income” ratio.

Does this mean you should run out and get the loan? Of course not. Your loan officer should have helped you ascertain and develop your objectives first, without regard to whether the bank will give you the money.

Here are some questions that I would have asked, had I been your loan officer.

• How much is your current monthly rent?

• What mortgage payment range falls within your comfort level?

• What purchase price range are you considering?

The answers to these questions will give me a good idea as to how realistic the purchasers are.

Some folks have done their homework. They know how much a particular purchase price will cost in a monthly payment, and they have a good idea of the funds for down payment and closing costs.

Other folks have no idea and perhaps were expecting to borrow $500,000 with a payment of only $1,500.

Once the borrower’s objectives have been more or less defined, we have to conduct a reality check. Many folks are disillusioned when they realize that their payment comfort level will buy them a mortgage smaller than they had hoped.

On the other hand, there are many folks like you who are surprised at how much money lenders are willing to throw at them. Remember, the lender doesn’t care if your payment is so high it prevents you from paying other bills, as long as it gets paid.

A good loan officer should be able to help you define a good plan that will bring together a mortgage level, down payment and purchase price range. This is a must before you begin the house hunt.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]pmcmortgage.com).

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