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Don't let the bank decide how much house you can afford

By anonymous follow anonymous   2016 Jan 17, 5:09am 3,598 views   13 comments   watch   nsfw   quote   share    


Over-housing is the concept of paying too much money for housing, in relation to one’s income. It can be the product of high housing prices, but its self-inflicted incarnation is much uglier and much scarier. A person who is over-housed will struggle in the short term and the long term. The damage is often irreversible.

Mark and Jennifer are a Midwestern couple in their mid-40s. About 11 years ago, they decided to take a plunge and build their “family home.”

“We knew we were pushing the limits of what we could afford, but we were approved for the loan and that gave us reassurance,” Jennifer told me. “Things spiraled out of control from there."

You know how much people love to say “it was a perfect storm”? There can’t be that many perfect storms, everybody. With housing, the slightest wind gust is enough to ruin someone’s financial life for decades. In no particular order, here are all the storm characteristics that can maroon a homeowner in just the first three years of homeownership: closing on a home with no emergency fund because it was used as a down payment, increased utility costs, home maintenance expenses, homeowners insurance price increases, property tax increases, loan terms shifting, homeowners association fee increases and new more appealing housing options in close proximity.

Fine, Mark and Jennifer may have met the perfect storm. They built a home that they couldn’t objectively afford. Their mortgage payment was equivalent to 42% of their net monthly income. They wiped out their emergency fund when they made their down payment. Their home was 2000 square feet bigger than their last home, thus the utility costs were markedly higher. After two storm claims, ironically enough, their homeowners insurance premiums went through the roof. Their property taxes were the killer. When they bought the home, the property tax assessment was based on the land alone, and not the structure. When the structure was figured into the assessment, their property tax bill tripled. The 3/1 ARM (adjustable rate mortgage) started to adjust and increased their mortgage payment by a couple hundred dollars. Meanwhile, the control of their homeowners association was transferred from the homebuilder to the homeowners. Dues quickly increased. And yes, a brand new neighborhood was built right next to Mark and Jennifer’s neighborhood, and their property valued dove as prospective homeowners now had newer, more appealing options.

During the last 11 years, Mark and Jennifer haven’t saved a dime for the future. They have no emergency savings.

Unequivocally, housing mistakes are the worst sort of financial mistakes you can make. Before you claim you aren’t Mark and Jennifer, take a moment and consider what you have given up in order to live in the home you live in. If you’ve given up expenses like vacations, new clothes, and dining out, then you’re probably OK. If you’ve given up your current and future stability, you’re in trouble.

More: http://www.usatoday.com/story/money/personalfinance/2016/01/17/dont-let-bank-decide-how-much-house-you-can-afford/78255292/

#housing

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1   _   ignore (0)   2016 Jan 17, 8:32am     ↓ dislike (0)   quote   flag      

Ironman says

Don't let the bank decide how much house you can afford

This is so true, the first thing I ask my clients, What is your comfort total mortgage payment level, Mortgage,Taxes and Insurance....

and I say you know always much better than what a Bank knows about you

2   _   ignore (0)   2016 Jan 17, 8:40am     ↓ dislike (0)   quote   flag      

Ironman says

But, before they get to you, they're first working with a realtor, and the realtor's first question they ask,

Even if they worked with a over zealous real estate agent, the laws of math will win out at the end know since lending standards are back to normal

People always ask me, how come 2014 and 2015 are my best years ever, you were working during the bubble years where demand was nuts... Yes, it was but I wouldn't touch those loans or give any of them out to my clients, So ..... no junk here....

Back then I anyone with a pulse could do anything they want because debt was exotic

Now, it's normal, only can get what your income can afford. However, a lot of my clients, which I love to see are not high debt to income ratio buyers, they all stick to their own limits, which limits what they can buy.

I love that... that's why I tell everyone this housing cycle are the best and cleanest buyer profile we will ever see in America

3   someone else   ignore (0)   2016 Jan 17, 8:58am     ↓ dislike (0)   quote   flag      

Logan Mohtashami says

the realtor's first question they ask

yup, that question is always to get buyers to give up what should be very secret information, in order to weaken the buyer's position.

you always want to enter negotiations with the other side knowing as little about your real position as possible. that's why sellers lie about asking prices in california. they won't accept their asking price as a rule. the price is intended to deceive buyers, to make them think they might possibly get the house for the asking price. they want to withhold information, keep buyers blind and get them bidding against each other.

unfortunately, your own realtor can never really be on your side, simply because of the financial incentives involved. if you overbid and get yourself into trouble, they are more likely to get the commission. if you don't overbid, they are likely to get nothing.

only you are on your side. hide your maximum price carefully, and even in your own head, put it lower than what you can really afford.

* actually, there is one case where a buyer's agent is actually on the buyer's side: when the buyer's agent is also the seller's agent. in that case, the agent gets double commission if that one buyer gets the house, so the dual agent has a big motive to prompt the seller to accept that that particular buyer's offer. in case you run into an agent with enough ethics not to explicitly represent both sides, a weaker but still effective version of this strategy is to get a buyer's agent from the same office as the seller's agent. then the commission stays in the same office and the agents' bosses are happy.

4   APOCALYPSEFUCKisShostakovitch   ignore (55)   2016 Jan 17, 9:08am     ↓ dislike (0)   quote   flag      

If you can't pay cash, you're going to be fucked in the ass by criminally insane engrossers.

Train your dog to point, pursue and disembowel all Realtors.

America will thank you.

5   _   ignore (0)   2016 Jan 17, 9:09am     ↓ dislike (0)   quote   flag      

Ironman says

we had to work around the 28/36 DTI ratio for payments. Isn't it higher now, like 36/45 ranges?

Even that 28/36 didn't give you much of a cushion for the unexpected bills that popped up.

43% MAX DTI for CFPB QM rules

They can go 43%-50% with extra financial strong points, such as high down payments and reserves

The main thing really is that you keep the debt as vanilla as possible

The trick with housing is this and it has been this way for decades

1. You get a fixed debt payment cost for the long term

2. Then that payment because less and less against your rising wages

( even if your wages only grow 2%) You're still making headway against the debt cost

Then if you really make more money that payment becomes less and less

Hence why I am ALWAYS fighting to not ease lending standards ... we are fine now, don't go back to the darkess

6   _   ignore (0)   2016 Jan 17, 10:24am     ↓ dislike (0)   quote   flag      

Ironman says

The 3/1 ARM (adjustable rate mortgage) started to adjust and increased their mortgage payment by a couple hundred dollars.

BOOM!!!!

One thing about ARMs that don't get talked about is that the adjusted amortization payment is going to get you

I have had a Arm loan since 2004 it re cast in 2009 and now 18 years left on the loan majority of my payment now in now principal but always anticipated a 50% increase of the payment at some point

Most people don't think that far ahead

7   HEY YOU   ignore (10)   2016 Jan 17, 10:57am     ↓ dislike (1)   quote   flag      

Everyone has the right to pay more than 10% of asking price for shitshacks.

8   anonymous   ignore (null)   2016 Jan 17, 11:02am     ↓ dislike (0)   quote   flag      

taking a 3/1 ARM is a sign that the purchase was not well thought out, presumably because the lower rate helped to qualify the loan. the story pretty much ends there, but it's good to think about other fee increases over time as that can be annoying from a budget perspective.

plus, you simply cannot empty out your savings account. retaining 6 months of reserves and buying a larger house may be ambitious, but 3 months of liquid prior to retirement account hardship withdrawals is probably the minimum.

however, one should consider that ratios and percentages of incomes can be misleading. the story gives a 42% figure for PITI over net income. the problem with this, is that the cost of other things don't scale very well. for example, if the couple was pulling $6000 monthly net, then they would be left with $3480 for other items. if they were pulling $12000 net, then they would be left with $6960 for other items. because the cost of other items tend to be fixed regardless of one's income level - the 42% figure in the second scenario doesn't seem that bad at all.

another note about ARM's - there are at least 3 versions, and the "hybrid" version is actually not that ugly if rates don't go crazy high. recasting and negative amortization does not pertain to all versions of ARM's. a really savvy buyer may take out a 3/1 hybrid ARM now and then refi at the adjustment period when fixed rate mortgages are 1% due to paltry global growth forecasts.

9   Tenpoundbass   ignore (14)   2016 Jan 17, 11:27am     ↓ dislike (0)   quote   flag      

When I bought my finance guy was really bothered that while he said I could afford a $350K to $425 range in a house. I had my heart set on paying no more than $175 when I was looking.

10   anonymous   ignore (null)   2016 Jan 17, 11:55am     ↓ dislike (0)   quote   flag      


* actually, there is one case where a buyer's agent is actually on the buyer's side: when the buyer's agent is also the seller's agent. in that case, the agent gets double commission if that one buyer gets the house, so the dual agent has a big motive to prompt the seller to accept that that particular buyer's offer. in case you run into an agent with enough ethics not to explicitly represent both sides, a weaker but still effective version of this strategy is to get a buyer's agent from the same office as the seller's agent. then the commission stays in the same office and the agents' bosses are happy.

i disagree with this, and it is actually illegal in some states. if you are being shown houses by an agent within a large brokerage that takes listings, then you are inevitably going to be filtered towards those listings as a business priority of the brokerage. this is conflict of interest, as you may not even know which listings are under which brokerage.

it is also never a good negotiating stance to have your representation be on both sides of the table. imagine going into a defensive position in court and having your attorney also act as the prosecutor. the seller's agent wants to sell that particular house, so the impartial investigations that are necessary for the buyer and his agent to conduct and analyze will be thrown right out the window.

11   anonymous   ignore (null)   2016 Jan 17, 12:26pm     ↓ dislike (0)   quote   flag      

attorneys are not free, and they do not provide those services pertinent to home buying decisions regarding market analysis, potential impacts to valuations, and considerations towards alternatives or other advice from experience within the local market. attorney involvement during closing is far too late, as there are only a few ways to get out of a contract of sale. forms are standardized, and so having an attorney look things over at that stage makes very little sense. in essence, you have paid out of pocket for a buyer's agent but at an attorney's hourly rate and without the services relevant to searching for a home that fits your needs/wants.

the only person who always benefits from a dual agent is the agent/brokerage. sometimes the seller gets screwed, sometimes the buyer gets screwed, but the dual agent always wins no matter what.

it doesn't matter if the buyer searches on their own. eventually, all things considered, if there are a few very similar homes under consideration and one happens to be listed under the dual agent's brokerage - then that is the one that the agent will push through various techniques and incentives. why even put yourself into the possibility of a conflict of interest?

12   anonymous   ignore (null)   2016 Jan 18, 8:59pm     ↓ dislike (0)   quote   flag      

Logan Mohtashami says

I love that... that's why I tell everyone this housing cycle are the best and cleanest buyer profile we will ever see in America

this, the new lending framework, and the restraint on development / over-capacity will most likely stabilize home prices for years.

13   _   ignore (0)   2016 Jan 18, 9:04pm     ↓ dislike (0)   quote   flag      

landtof says

restraint on development / over-capacity will most likely stabilize home prices for years.

More and less the ability of a crash is very little when you have 30% of the homes bought with cash and the rest are vanilla debt structure, so you really need a job loss recession to create a new distress cycle, plus renting was so big in this cycle that a lot of junk is in the renting units rather than housing.

Probably see a bigger impact on the rental market than home ownership market place when the next recession hits since it's a powerful renting cycle


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