Most of us who have bought a home or considering buying a home have awareness of what the LTV is or Loan-to-Value ratio, one of the factors that lenders use to determine whether a borrower is qualified for the home they want to purchase. Lenders typically like a mortgage payment to be between 28%-33% of the borrower’s income and a total debt to be under 40% (FHA guidelines are less restrictive).
Lenders tend to think that the higher the LTV rate is, the more likely a borrower may default on the loan. The danger of a high LTV is that the buyer/borrower will end up “house poor”. House poor individuals are homeowners that are short of cash for discretionary items, home repairs or often adopt the “rob Peter to pay Paul” bill paying method.
Buying a home you can't comfortably afford is only the beginning. Can you maintain your home once you've gotten your keys? There are many unexpected emergencies that can all of the sudden pop up:
- Home Repair
- Vehicle Emergency
- Medical Emergency
- Job Loss
Before you know it, you may find yourself maxed out on credit cards and struggling to make all your payments on time. Cutting costs might include Top Ramen for dinner, cutting your cable bill, or worse yet, paying all your bills on credit cards. When you're living paycheck to paycheck, missing just one could be enough to crumble your world.
When considering a new home, just a gentle reminder to keep the three Ps in mind: Price, Practically and Patience.
- Price: You don't have to buy at the max of what the lender gives you. Breaking down the monthly payments and looking at a detailed accounting of what the home will cost you may be a better determining factor of what you can afford than the sales price of the house.
- Practicality: If your budget is stretched to the limit, what will that mean for your future in terms of being able to save for college and other important items? What will it mean for the immediate future? Are the sacrifices you need to make in terms of limiting entertainment, vacations, gifts, etc. worth it?
- Patience: When you're not finding the right house in your price range, it can be tempting to raise it. Remembering how you want to live in that house can help you refocus.
