Do you know how much mortgage you can afford? Are you sure you know?
Tom Champion has been in the mortgage business for years, first as a loan originator and now as regional manager in Maryland, Virginia and D.C. for Mortgage Loan Inspection. He thinks people should know that qualifying for a loan isn't the same thing as being able to afford it, even though we're several years past the era of super-lax requirements.
Here's what he had to say when we chatted for a Q&A:
Question: You drew up an example budget: $226,550 loan for a family making $62,900 a year. Is that typical? What’s the problem with this scenario?
I drew that up because I wanted to show you what the qualifications under the guidelines for FHA would be for that property.... They are qualified under FHA guidelines to purchase, no problem. However, if you review the budget, they have less than $100 left over with nothing being contributed to their saving, 401(k) or [children's] education fund. They have no options if there is a problem with employment or sickness in the family. ...
When you walk into an originator to say, "Can we afford this," the originator is going to apply the guidelines for that particular agency, be it Fannie Mae, Freddie Mac, or FHA or a private lender. Under those guidelines, that's the minimum requirements. That makes you feel good, and you [say], "Oh my gosh, we're better off than I thought."
But then you have to stop, detach from the emotion and look at your current budget, and look at the possible increase you may feel over the next three years, look at the possible expenses you may incur. ... If I'm further from my work, am I going to have to replace the car? Am I going to spend more gas? It's back to thinking it through the rest of the way and applying numbers.
In the budget I gave you, you can see that these people are what I call "house poor."
Q. What should people do to figure out how much mortgage they can comfortably afford?
A. What they really should do is to look at their current budget -- which they should have; if they don't, it would be a great exercise for them. ... Be realistic. This is not a test. This is about your lifestyle. So the first and foremost thing is to put together a budget of your expenses and your income. Now you want to go back and look at the property taxes, as well as the mortgage payment, including taxes and insurance.
Then adjust the budget for whatever changes that are going to happen for the location of your new house. ... "I'm moving from Baltimore City to Baltimore County; now I'm going to be 25 miles from work rather than 10 miles from work." Make all the adjustments as best as you can.
Q. And then?
A. Look at the bottom line. Now you have a basis for you internally, for you and your partner or spouse to be able to look at what lifestyle changes are needed, if any. ...
You really have to follow it through, rather than getting involved in the emotion of, "We're buying a new home!" That's one thing I see -- I’ve spent over 20 years in lending -- the emotion takes over and the logic leaves.
Q. So you're telling people to understand precisely what they're getting into?
A. Absolutely. Because this is not something you take lightly. This is the biggest purchase of your life. You are committing to a possible 30-year term of debt. Why not take a few days to really walk through it, instead of, "Oh honey, they say we can afford this house, let's go put a contract in"? This is the frenzy that was created in 2004, 5 and 6. There was limited inventory on the market, and they knew the house was going to go in hours or days, so it was about getting the house, making the deal work, rather than looking at its long-term impact.
Q. You recently launched a local branch of Mortgage Loan Inspection, which compares its service to home inspection. How so?
A. When home inspectors started their service, they were considered by Realtors as deal killers. Today, you will not see a home purchased without a home inspection, whether it's used in the contract or not. People want to know.
We are simply an independent advocate for the borrower. We have no affiliation with anyone, point blank period. We will never make a recommendation for a lender, title company or Realtor. We have no affiliation with them. That is our independence. What we're going to do is simply, we're going to pre-qualify that borrower on one, the traditional methods used by the lender. No. 2, we're going to come back and qualify them on a budget. ...
We're going to ask them to obtain a credit report. ... We're going to at that point set their expectation level of how they rank within the credit quality. We're going to ask them to provide to us all of the documentation that a lender is going to ask them for. We're going to review it to see that it complies with what they have told us, just like a lender. ...
If they choose to go forward, then when they will do their shopping, every time they work with a lender, we will review the lender's paperwork. ... We are looking for unethical lenders, we're looking for compliance to federal law. We're looking to make sure that transaction is exactly what they've been told. ... We will monitor that transaction all the way to closing ... and we will make them aware of anything that changes.
Q. How are you paid? Upfront fee?
A. They can pay our fee upfront with a guarantee of a 100 percent refund if they are turned down by their lender after we say they shouldn't be, or two, they can simply defer that fee and it will be collected on their settlement sheet.
Q. Is it hard to convince people to pay for something extra in the home-buying process?
A. There is a reluctance on the consumer's standpoint simply because it looks like another fee. But once we have the potential borrower in the process, they suddenly go, "Wow, this is the best money I've ever spent, because you talk in plain English and you're not trying to sell me anything."