Mortgage lending requirements are stricter than they were in the days before the 2008 Great Recession, when tons of people lost homes they couldn’t afford. But the stricter requirements of today don’t mean immunity. Just because a lender qualifies you for a mortgage doesn’t mean you’re not at high risk of losing your house.
I had a COVID-safe chat with Justin Bitensky, a mortgage loan officer based in Santa Monica, to discuss the mortgage qualification process.
“Buyers should not rely solely on their mortgage pre-approval to determine what they can afford,” says Bitensky. “Just because you qualify for a million-dollar house doesn’t mean you should buy a million-dollar house.” A lot of personal expenses are not included in the qualification process.
When considering debt, lenders mostly look at what appears on the borrower’s credit report. This means personal debt can be overlooked, like the money you borrowed from grandpa to buy a car. Also not accurately accounted for are expenses like car and health insurance, utility bills, vacations, shopping habits, and other lifestyle expenses.
Bitensky tells me the hypothetical story of Bob and Jane. By mortgage standards, they both qualify for a one-million-dollar home purchase. But by individual standards, Bob should not qualify for anything because he has high insurance premiums and a shopping addiction, and vacations every weekend—all expenses that a lender cannot accurately account for.
On the income side, lenders will typically look at a borrower’s earnings before taxes, not after taxes, which doesn’t necessarily capture the borrower’s true spending power.
For example, let’s say Marcus makes $7,900 per month before taxes. A lender can allow up to 50% of this pre-tax monthly amount to go toward his mortgage-related expenses and other credit expenses, like car payments and credit cards.
But after payroll deductions and taxes, Marcus really only takes home about $5,240 a month. Assuming Marcus has no other credit expenses, a lender could qualify him for a mortgage of about $700,000, with monthly payments of about $4,000 (including principal, interest, property taxes, and insurance).
After paying his mortgage, Marcus would be left with about $1,240 a month to cover his other expenses—food, gas, car insurance, vacations, home repairs, and more. This would force once-upon-a-time, debt-free Marcus to furnish his new house on credit.
At $7,900 a month, Marcus makes good money. Someone making less could be left with as little as $600 or less a month after making their mortgage payment.
“Borrowers need to be very honest with themselves about their finances,” Bitensky says. “They need to look at their after-tax income and all their expenses. The mortgage pre-approval information should only be used as a tool, not a certificate to buy a million-dollar-house.”
Buyers should also consider the new expenses that homeownership will bring, like move-in costs, maintenance and repairs, home remodels, and more—all things that don’t necessarily concern the lender.
Real estate is a great investment; it pays off. But before embarking, do as Bitensky says: be honest with yourself, your finances, and with how much you can afford. Only you know best.
Justin Bitensky is an experienced licensed Mortgage Loan Officer (NMLS # 1827357) with a myriad of financial products for residential purchases and refinances. Contact info: 323-919-5104 | JustinB@EquitySmartLoans.com
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About the Writer: Daniel Rangel is a real estate agent. "I love doing these interviews. Aside from fun, they give me access to knowledge, which I pass down to my clients.