I now understand paycheck to paycheck

[Nutria]

It's the mortgage bankers and that crazy 38% gross DTI ratio.

When adding up our two legal debts and dividing them by our gross, it comes to a measly 8%. But when we add unofficial debts like semi-annual auto insurance, property tax & kids tuition (stuff that we must pay in the future), it jumps to 22%.

So that "38% DTI" that they think I could afford would drive us to the brink of insolvency just like so many other people are teetering on insolvency.

[Randomsaver]

So 22% does not include yet mortgage and 38% does? Or is 38% all mortgage and you have to add 22%?

[Nutria]

It includes our small mortgage. But if our budget had to swallow a mortgage that bumped our gross DTI up to 38%, we'd be living on the edge, too.

[LivingAlmostLarge]

This was my point earlier on how someone making $70k now thinks $500k home is super "affordable". And that $100k can afford $600-700k. Makes me think that mortgage brokers are super into lending and getting people to stretch to afford the most they possibly can.

I cringe that someone making $100k = $3k/month at 36% DTI can afford $600k mortgage @ 3.92% or around $700k home or $670k to be exact. The numbers seriously after taxes and saving for retirement just are impossible.

[GrowingTheGreen]

I believe the term is "house poor"

[ThriftoRama]

The worst idea ever is basing your housing decision on what the mortgage banker says you can afford. We made that mistake with our first house, and never again. The stress of paying for it every month was not worth it. We had to give up all the other things we liked because we couldn't afford it.

We were young and naive. We are now on our third house. For the past two, we have instead been approved for a loan, but based our actual house choice/price on what we were comfortable paying and could pay in a worst case scenario, and what we could afford to pay off within a reasonable amount of time.

We are about to pay off our current house. After five years with a mortgage. That feels a lot better than a more expensive house!

[greenskeeper]

most people don't have a budget to even begin to know what they can or cannot afford

[KevinLars]

Sounds like you were putting all your eggs in the one basket. I guess on the plus side you were more focused towards the singular goal of owning your own house, as opposed to someone who rents cheap so they can have money to do 10 other hobbies and no future investment to hold onto. It can be a challenge to find your own personal balance between being focused on a few results and enjoying a number of pursuits.

________________
Kevin Lars
stressnut.com

[pflyers85]

This was my point earlier on how someone making $70k now thinks $500k home is super "affordable". And that $100k can afford $600-700k. Makes me think that mortgage brokers are super into lending and getting people to stretch to afford the most they possibly can.

I cringe that someone making $100k = $3k/month at 36% DTI can afford $600k mortgage @ 3.92% or around $700k home or $670k to be exact. The numbers seriously after taxes and saving for retirement just are impossible.

Mortgage brokers and lending institutions have been highly successful in conning the average Joe and Jane into believing that the accumulation of a massive debt is the only way to achieve the sick joke most refer to as "The American Dream".

"You feel like these mortgage payments will be overwhelming to your budget?" "Don't worry with your credit you will easily be able to qualify for our various loan products and other lines of credit to help you if you encounter any hardship in the future." Far too many people force themselves to live like hamsters in a wheel running without a purpose because they have been duped into this faulty premise.

It's very tough to find the answer to this dilemma. Most Americans will not acknowledge that there is a problem and without an acknowledged problem its nearly impossible to come up with a viable solution. They have their 4 bedroom, 3 bathroom house in a nice school district and drive new leased cars. They also are in debt up to their eyeballs but they have the tangible trappings of perceived wealth so in their eyes they have made it.

[Jluke]

Mortgage brokers and lending institutions have been highly successful in conning the average Joe and Jane into believing that the accumulation of a massive debt is the only way to achieve the sick joke most refer to as "The American Dream".

It's very tough to find the answer to this dilemma.

Some people would point towards the "schools" to teach people basics of budgeting and personal finance. From what I remember back in high school, I think the closest we got to personal finance was picking stocks and pretending to invest in them.

I'm going to take the approach that, as a parent, I need to teach my son the ins and outs of finance . I am still learning, but my parents kind of let me figure things out on my own - though I am incredibly conservative by nature when it comes to money. They introduced the amortization schedule to me and blindly educated me through their own struggles early on.

Fundamental math skills as well as negotiating tactics (which I'm not so good at) are two important things to pass on.

If people were more aware, then the banks, lenders, etc wouldn't be able to capitalize on them.

[pflyers85]

Some people would point towards the "schools" to teach people basics of budgeting and personal finance. From what I remember back in high school, I think the closest we got to personal finance was picking stocks and pretending to invest in them.

I'm going to take the approach that, as a parent, I need to teach my son the ins and outs of finance . I am still learning, but my parents kind of let me figure things out on my own - though I am incredibly conservative by nature when it comes to money. They introduced the amortization schedule to me and blindly educated me through their own struggles early on.

Fundamental math skills as well as negotiating tactics (which I'm not so good at) are two important things to pass on.

If people were more aware, then the banks, lenders, etc wouldn't be able to capitalize on them.

To clarify from my previous post I wasn't totally blaming mortgage brokers and other lending institutions for people getting into a really bad financial situations. As you correctly point out many people allow themselves to be easy prey because they do not educate themselves or fully go through all the pros and cons of every financial decision they make.

With that said I don't believe a lack of education is the primary culprit. I think the problem more than lack of education is that society today craves quick fixes and instant gratification. The information is out there and widely available but it falls on deaf ears because its not what people want to hear. Most people don't want to hear that they will have to work harder and sacrifice more in the short term to get ahead. No need for layaway or to save money when we can apply for a store credit card and get the items we want today. We are taught in school that to be healthy we need to take care of our body by eating nutritious foods and getting regular exercise. Even with that knowledge being drilled into us at an early age and well into young adulthood we still have obesity running rampant.

I am not opposed to schools making it a point of emphasis to do a better job teaching finance and budgeting, I just question how much of a difference it will make.

[disneysteve]

I am not opposed to schools making it a point of emphasis to do a better job teaching finance and budgeting, I just question how much of a difference it will make.

Much more than from what they learn in school, children learn from what is modeled for them at home. If mom and dad whip out a credit card every time they buy something and never explain how it works, guess what junior learns. If mom and dad are always arguing about money, or telling the kid they "can't afford" something the kid asks for while sitting in front of their 60" HD TV, or leasing a new car every 2-3 years, or otherwise making poor financial decisions, that's what the kid learns.

Most kids aren't learning good financial habits because most parents aren't practicing good financial habits.

I've posted before about what I've done with our daughter. Fairly early on, maybe age 9 or 10, I taught her how to balance our checkbook. There were a few purposes to this. One, it helped work on her math skills. Two, it introduced her to the concept of managing personal finances. Three, it exposed her to the costs of life. She would ask what different things were for, especially the bigger numbers like the mortgage payment or other loan payments. She would see how much money was coming in and where it was all going. Just that last piece alone is something that so many parents intentionally hide from their kids.

As she got a little older, I would sit with her at the computer and do "Dad's Financial Academy". I'd teach her about various forms of payment: cash, checks, debit, and credit. I'd explain how credit cards work, why a lot of people get into trouble with them, and why we don't. I'd teach her about loans and interest and about savings and investments and interest. I'd explain the benefit of compounding and the importance of starting to save early on.

Today, she's 20 and in her 2nd year of college. She's surrounded by peers who are perpetually broke and she's got a 5-figure balance in her savings account. She has a rewards credit card that she gets cashback from every quarter, and she qualified for it on her own. I didn't have to co-sign. She has no debt. She balances her checkbook every month. And she started her Roth when she was 17.

[LivingAlmostLarge]

It's not easy but I agree that it does start at home. But at the same time I think even people who are raised in financially savvy homes sometimes can easily get swayed into spending more. It could happen overnight. It could start with justification that you just need everything to break a certain way. Or borrow until that next job or promotion.

[disneysteve]

It's not easy but I agree that it does start at home. But at the same time I think even people who are raised in financially savvy homes sometimes can easily get swayed into spending more.

Certainly. Especially when you are surrounded by stupid. I worry about DD getting sucked into the financial ineptitude of her peers. I just hope that we've given her a solid enough education and foundation for her to know right from wrong and make good decisions as an adult. Plus she has never hesitated to text or call when she had a question about something.

[LivingAlmostLarge]

Plus some people don't do credit card debt or overspending. It all starts with student loans. AND EVERYONE tells them it's okay. It's for your education. They never say $100k when you are becoming a teacher or social worker or musician is a bad idea. Instead EVERYONE is encouraging the most debt for the "best school" or just to go to college instead of stepping back and thinking about it long term.

So these kids who otherwise might be pretty good financially start off in the hole without an idea on how to dig out. They know to not overspend on credit cards and that they should save but already have debt and no idea what to do when it's costing them $1k/month.

I mean "responsible" parents who don't have credit card debts, live within their means "borrow" and cosign private loans for college! Without a second thought.