How do people in debt become homeowners??

neatdesign · #1 (**permalink**) 09-09-2006, 09:23 PM

I hope this doesn't seem like a stupid question, but I'd like to know how people who are in debt can become homeowners. By "in debt" I mean significantly in debt, not just $1000 or something. I mean thousands of dollars in debt, either due to student loans, car loans and/or credit card debt.

We are approximately $30k in debt; about 2/3 of that is from credit cards. In spite of this, we have good credit and have never missed a payment. The thing is, I know there are people who are even more in debt than we are, whose incomes are similar to or less than ours, and yet somehow they manage to become homeowners.

How do they do it?? How can they afford it?? How do they qualify for mortgages when they have such high payments to pay off their debts, on top of all their other expenses?? How can they do that when their debt-to-income ratios are so high???

I have the mindset that it really isn't practical to become a homeowner until you are either debt-free or have very little revolving debt (less than $5000 or so). We would LOVE to get out of our one-bedroom apartment but don't really see that happening until nearly all of our debt is paid off. Which makes us feel very depressed because we know that's not going to happen for quite some time.

Am I totally off for thinking this way?? How can WE become homeowners???

~ Jenney

amberfocus · #2 (**permalink**) 09-09-2006, 11:22 PM

My student loans won't be going away for another 15 years (assuming I don't defer for grad school), but I certainly hope that I can buy a house before then!

I know my SO, who is three years older and similarly in student loan debt, has already qualified for a $250K mortgage. He can probably get $300K now, actually, since he just got a raise.

I suspect that while debt does hurt you, it's your net worth and/or income that matters more, as well as your ability to put down a down payment of at least 20%?

This is just a guess. Hopefully, someone more experienced will either confirm or correct this hypothesis.

~mimi

safari · #3 (**permalink**) 09-10-2006, 01:09 AM

Debt is one of the factors that lenders look at. Like the previous poster said, they also consider your assets (net worth) and salary. I read somewhere that in order to qualify for a loan, the projected monthly payment must be less than 38% of your gross monthly income. Also, all your monthly debt payments together with the mortgage payment should not exceed 45% of your gross income. So it's harder to qualify for a 30 year fixed loan than for a 1/3/5 year ARM because usually the longer the fixed term is, the higher the interest is. If you can barely qualify for 1 year fixed loan, it's probably not a good idea to buy a house because if the interest rate starts rising after the first year, you won't be able to make your mortgage payment. My neighbour who bought a house just 1.5 years ago, is now desperately trying to sell it because he can no longer afford it.

If someone wants to get a mortage, there is always a way. When applying for a loan, they can choose to go with "stated income" instead of "full documentation." This means that they don't need to submit any proof of their assets and income. In this case the interest rate will usually be higher. I know people who did that to get a loan, which they were not able to qualify for, using the "full documentation" method. However, after you get a loan, the lender can choose to review your loan application and ask you to submit all the proof (similar to IRS audit). So even if you've been paying on time, if you can't prove the income stated in the application, the lender can request you to pay off the loan in full immediately. This could happen several years after the loan was obtained, so there is a big risk associated with the "stated income" method.

Then there are so called "subprime" lenders, who can give a loan to pretty much anybody, regardless of their debt and income. The interest rate is going to be a lot higher though on this kind of a loan. The problem is that if a person cannot qualify for a regular loan because he doesn't have sufficient income, how is he going to make payments on the subprime loan, considering the fact that the payment going to be much higher?

If you don't think you can afford to buy a house, don't do it! Just continue renting and saving money. The house might happen sooner than you think.

Mathew Green · #4 (**permalink**) 09-10-2006, 08:04 AM

Quote:

Originally Posted by safari

If you don't think you can afford to buy a house, don't do it! Just continue renting and saving money. The house might happen sooner than you think.

I'll second that! Homesellers, agents, and lenders will all try to sell you the biggest mortgage they possibly can because the more you pay for the house the more money they make.

In my case, I had a lot of debt but was paying it off rapidly because of a new better-paying job. When circumstances forced me to move, I made a firm decision that my total monthly house payments (including escrow) couldn't be more than $xxx because any more than that would cut into my "minimum-required-payment margin-of-safety" too much. I was also acutely aware that every dollar I devoted to buying a house would make it take longer to repay my big CC balances. So I stood firm on my max monthly payment figure, but it wasn't easy.

Given the max monthly payment I was willing to make, I was limited to houses under $60,000. Everybody involved told me I could easily qualify for a $90,000 house and would have a lot more houses to choose from if I accepted a bigger mortgage.

Bottom line: I bought a $55,000 house in a nice lower-working-class neighborhood. One year later the tech bubble burst! I lost my job and had to take one that paid a lot less. It was a real struggle just to make ends meet during the next two years. If I'd had a bigger mortgage it would have sunk me! I now have a job that pays as much as my old one did and I'm starting to make progress on my CC debts again, but the only thing that kept me afloat during those hard times was my prudence in limiting my house shopping to a monthly payment I knew I could really afford.

What has happened, can happen (and given Murphy's Law it probably will.) So never take someone elses word for how much you can afford to spend, unless their figure is lower than yours. The people you've seen buying houses they really can't afford haven't figured that out yet.

JasonEngler · #5 (**permalink**) 09-10-2006, 08:26 AM

I agree with the poster above, the lender, home builder, realtor...everyone is trying to make $ off you purchasing a home so it makes sense they want you to buy the biggest, nicest home, with all the options... and not really focus on payments, property taxes, school income tax levys, or other variables that make up your monthly payment.

If you don't feel in your gut you can swing it... then consider the situation the poster above wrote. If you or your SO lost their job could you still swing the payments? If not, then strong considering your situation again. It is tough to try and buy a home when you have foreclosed in the past or file for bankruptcy. You may decide to purchase a home but then not be able to enjoy it because you are up every night worrying about finances....not fun at all.

Keep saving!

Jason

neatdesign · #6 (**permalink**) 09-10-2006, 09:01 AM

Quote:

Originally Posted by safari

Debt is one of the factors that lenders look at. Like the previous poster said, they also consider your assets (net worth) and salary. I read somewhere that in order to qualify for a loan, the projected monthly payment must be less than 38% of your gross monthly income. Also, all your monthly debt payments together with the mortgage payment should not exceed 45% of your gross income.

Based on the figures you've quoted, we could definitely qualify for a loan. The rent we're paying on our apartment is $770/month. That's only 24% of our gross annual income. So we're good in that respect.

As for our monthly debt payments, they are roughly $1000/month. This includes payments for two credit cards, one consumer loan and one auto loan. That's about 30% of our gross annual income. So apparently we're doing well in that respect, too.

So if our monthly mortgage payments were equal to what we're paying now in rent, we could get a mortgage loan for about $120k. And $120k could buy us an actual HOUSE with a yard. We don't need anything huge or fancy -- after living in a one-bedroom apartment for nearly 6 years, anything else will seem like a mansion.

I realize this should make me feel a lot better about our situation. But despite how the lending industry works, the reality is that we don't live on our gross annual income, we live on our net annual income. And the reality is that there is far more to pay for than just our consumer debt. We have to eat, too, and clothe ourselves and have electricity and stuff like that.

So when I hear "monthly debt payments" I actually don't just think of our credit card/loan payments -- I think of ALL our monthly expenses. Because of that, I don't feel like we're ever going to be able to afford to buy a house, because we're just scraping by as it is.

Even if the mortgage payments are the same as what we're paying now in rent.

And don't even mention the 20% downpayment -- that's just ridiculous. There's NO WAY we could afford to put 20% down. We're doing all we can just to preserve (and slowly add to) the $2000 emergency savings we've got. I mean, if we had enough savings to pay down 20% on a house -- even an inexpensive house -- we'd be out of debt already!

So how do people do it? How do they save up for a 20% down payment AND afford the mortgage payment AND afford to pay down debt AND all the other bills in life? On the surface it looks like we could get a loan and buy a home, but reality tells me differently.

Is it just that people are being foolish when they decide to buy a home despite having a lot of debt? Everyone says that home ownership has huge financial advantages and paying rent month after month is just throwing money down the drain. I tend to agree, but don't see how we can change our situation.

~ Jenney

Fizgig · #7 (**permalink**) 09-10-2006, 09:50 AM

Many people don't put 20% down these days. I'll admit it - I didn't. I only put down 5%. That could be a bad decision most of the time, but I got my house for way under market value and at the historically lowest interest rates ever. I can easily afford it, but at 27 when I bought the house, I simply hadn't had enough time to save up $30,000. However, I did/do have very little debt - about $3000 in student loans and $3000 on a car (now paid off). If I had a lot of CC/other debt I would have been far less comfortable buying a house.

Do NOT overcommit yourself on a house. The 45% debt to income ratio is what the lenders use, but anything over 30-35% will put a strain on you. There is a tax advantage that will help you out - My monthly payment is about $1100 including taxes and insurance, but because of it I get $200/mo extra takehome with the tax advantage.

I personally don't think that someone has to be debt free and have 20% down to buy a house. It can still be a good decision if you buy something affordable and get a low interest fixed rate, and still have plenty of room in your budget for everything else AND savings. Make sure you price out taxes and insurance in considering what you can afford. Also, chances are your utilities will be much higher, and budget in $100-200/mo to throw in a savings account for home repairs. If the fridge breaks or the roof starts falling down, that's all on you.

safari · #8 (**permalink**) 09-10-2006, 11:06 AM

Quote:

Originally Posted by neatdesign

So when I hear "monthly debt payments" I actually don't just think of our credit card/loan payments -- I think of ALL our monthly expenses. Because of that, I don't feel like we're ever going to be able to afford to buy a house, because we're just scraping by as it is.

Even if the mortgage payments are the same as what we're paying now in rent.

If your mortgage payment is going to be the same or close to your current rent payment, I don't see any reason why you can't buy a house, especially considering the fact that your mortgage interest and property taxes will be tax deductible. In addition, if you get a 30-year fixed loan, you're guaranteed that your monthly payment will never increase (aside from property taxes if your home value increases), unlike your rent, which can be raised every year. As your income increases, it will be easier for you to manage your monthly budget. Also, as the previous poster said, these days you don't need to pay 20% down to buy a house. When I bought a house 5 years ago, I payed 5% down and took a piggy back loan to avoid paying PMI (private mortgage insurance). You must pay PMI if your first mortagage is greater than 80% of the purchase price; however, this can be avoided by taking a second mortgage in the amount of 15% of the purchase price. Even though the interest on the second mortgage is higher than on the first mortgage, it's usually better than paying PMI because PMI is not tax deductible. However, if the interest rate on the second mortgage is too high, it may be better to pay PMI, which can be eliminated later when your house value rises and your equity reaches 20%. Buying the house was the best decision I ever made. It has since doubled in price, and I wouldn't be able to buy the same house now, even though my income also rose significantly.

In conclusion, you don't need to be debt-free to buy a house. You just have to analyze your financial situation and see if you would be able to make the mortgage payments without overextending yourself. However, I strongly recommend that you first build an emergency fund, sufficient to live off for 3-6 months. Once you have your emergency fund and 5% downpayment, you can start looking for a house.

getforfree · #9 (**permalink**) 09-10-2006, 11:10 AM

When we were buying our house 2 yrs ago, we went with a stated income. We didn't have any debts. Our income that time was less than 25k/yr. If we would have stated our real income, there would be no way to qualify for 205K house. And that was the lowest price you could find around here in normal area. The house needed tons of repairs, which we did ourselves. We were making a little over 2K/month, and our monthly payment was 1607$ because that time we had mortgage insurance. Now we pay 1445, and make more. We were paying more than 75% of our income towards the mortgage, while estra spending on building materials for repairs, and we made it. As long as all your bills are less than your income, it's fine, even if it means $0 for intertaiment and eating out.

Fizgig · #10 (**permalink**) 09-10-2006, 11:20 AM

There are psychological advantages, too...

Buying the house put me in a completely different frame of mind financially. I am MUCH better at sticking to my budget, and have actually pared it down a lot since I bought the house. My net worth has gone crazy since I bought it, and I'm not even counting home equity. I simply steward my money much much better, and have this feeling of empowerment because I set a goal and did it. My goals get loftier and loftier and I have concrete plans to reach them. The responsibility and obligation of the house made me take my money much more seriously.

LuxLiving · #11 (**permalink**) 09-10-2006, 12:58 PM

Jenney - Do you belong to a credit union? I'd go there and see if one of the loan counselors couldn't talk you thru your bills vs. opportunity lost vs. worries vs. facts scenarios. Look around in maybe the Sunday paper and see where they are offering a first time home buyers seminar. Go. Call a mortgage company or realtor and ask them about prequalifying for a loan...see what they say. Then as advised here back off some on the amount of 'house' they say you can buy.

I'm with the poster above...they've tried over the years to tell The Hubster and I that we can afford more house than we have. I don't think so. Guess who wins. Me! You know what you can do...but let them help you understand the facts a little better. A bit of education never hurts too much!

Not knowing where you live I can't say for certain but given the amount of rent you are paying I'd say that you can definitely afford a house and the sooner the better. Even in a big metro area like ours there are still some lower priced houses around and with what you are paying in rent I could buy three times the house I have!

Explore some options with a close eye to the facts and see where you come up. Right now you are doing quite a bit of suppositioning w/o the real world facts & figures of your local economy and real estate market professionals. See what the pros have to say, but keep one hand on your wallet sweetie!! Good luck and let us know how it goes!!

#12 (**permalink**) 09-10-2006, 02:37 PM

Quote:

Originally Posted by Fizgig

There are psychological advantages, too...

Buying the house put me in a completely different frame of mind financially...

I am so hoping for that when I pull the trigger. I know when I buy I will be introduced to much more then just a house payment (taxes, repairs, insurance, appliances, etc.) My hope is that getting over that very large "hump" will put things in a whole different light from a financial standpoint.

I'm hoping......

disneysteve · #13 (**permalink**) 09-10-2006, 05:36 PM

Quote:

Originally Posted by neatdesign

I hope this doesn't seem like a stupid question, but I'd like to know how people who are in debt can become homeowners. By "in debt" I mean significantly in debt, not just $1000 or something. I mean thousands of dollars in debt, either due to student loans, car loans and/or credit card debt.

When we bought our house, I had about 100K in student loans and DW still had a year or so left on her car loan. We had no CC debt (never have, never will). We were earning about 85K as I recall. We had no trouble getting a mortgage as we both had excellent credit scores. We were prequalified for about 50K more than we ultimately borrowed. We did put down 20%.

lrjohnson · #14 (**permalink**) 09-10-2006, 05:37 PM

Quote:

Originally Posted by rexdart

I am so hoping for that when I pull the trigger. I know when I buy I will be introduced to much more then just a house payment (taxes, repairs, insurance, appliances, etc.) My hope is that getting over that very large "hump" will put things in a whole different light from a financial standpoint.

I'm hoping......

Yeah, me too. I picked up loan paper work a couple months ago, just to get pre-qualified and get a sense of where I'm at, and just started filling it out. The whole thing seems like a very big hump to me. I have no debt at all and good ioncome for my area, so it feels weird to think I'm not in a position to buy when people earning less with more debt have places. Am I uneducated about this, or did those folks overextend? Well, a little of both I'm sure. Rex, i'll watch yer journey too.

disneysteve · #15 (**permalink**) 09-10-2006, 06:09 PM

Quote:

Originally Posted by lrjohnson

I have no debt at all and good ioncome for my area, so it feels weird to think I'm not in a position to buy when people earning less with more debt have places.

Why do you think you aren't in a position to buy? If you have good income and no debt, and a good credit score, you should have no problem at all. Just be sure to figure out on your own what you can afford. Don't go with what the mortgage guy trys to tell you.

And yes, a lot of people in recent years have way overextended themselves often by getting sucked in to ARMs or interest-only loans. Now that principal payments are coming due and rates are climbing, many of these people are finding themselves in big trouble. Foreclosures are up 1/3 over last year at this time and are expected to continue rising as more ARMs adjust.

lrjohnson · #16 (**permalink**) 09-10-2006, 06:59 PM

Quote:

Originally Posted by disneysteve

Why do you think you aren't in a position to buy? If you have good income and no debt, and a good credit score, you should have no problem at all. Just be sure to figure out on your own what you can afford. Don't go with what the mortgage guy trys to tell you.

I admit I'm not educated on this. Maybe I think too old-fashioned. I keep hearing that you can usually borrow up to three times your annual income. I'm in California; that won't get me a house in this State, even in my Northern rural county.

disneysteve · #17 (**permalink**) 09-10-2006, 07:19 PM

Quote:

Originally Posted by lrjohnson

I keep hearing that you can usually borrow up to three times your annual income. I'm in California; that won't get me a house in this State, even in my Northern rural county.

It is possible that you can't comfortably afford a house in the area you want to be. I know California is one of those places that has seen insane appreciation in recent years.

In that case, keep renting. Don't get talked into any "creative" financing deal that lets you buy more house than you can really afford. Keep saving for a downpayment and hope that prices level off. If you can save up a big downpayment, that will make affording a home that much easier.

LuxLiving · #18 (**permalink**) 09-10-2006, 07:52 PM

lrjohnson might there be ways to partner with someone to help you get into a house? Sounds like things are horribly expensive where you live. Just remember, where there's a will, there's a way. Terribly cliche' I know, but an action plan put into play can make just about anything happen!

Keep wrapping that brilliant noodle of yours around the challenge opportunity and you'll get there!

Ima saver · #19 (**permalink**) 09-11-2006, 06:32 AM

Buying a house when I was young has made the biggest difference in my life. I bought my first house at age 21, by age 30, I sold it, made a good profit, and built a bigger house. I was mortage free at age 32 because I concentrated all my efforts into saving money and paying off my mortgage. My house now is worth over a half mil and is paid for.
I would not go over my head buying too much house. By a cheap house, fix it up and make extra payments on the principal as often as you can.