I had an experience I was planning to share and after writing about Student Loans and Your First Mortgage, today is the day to do it. In that article, I wrote that a couple earning $100K could afford a house worth as much as $465K if they had a 20% down payment saved up. I actually think this is on the high side, but given how low rates are today, the numbers work.
If you’ve not read the article earlier this week, I used two ratios, 28% of monthly income to go towards housing cost, and 36% to total debt servicing. This is how responsible banks qualified borrowers before the mid-2000 bubble that nearly destroyed the economy.
On a personal note, I am taking the state mandated 40 hour class that will let me sit for the real estate salesperson exam. (Note – the word Realtor is trademarked, one has to have the license to become a Realtor, but not all real estate agents are Realtors.) That said, the class is offered over 4 consecutive Saturdays, a long day, 10 hours of stuff we’ll never use after taking the test. We were honored to have a guest speaker join us, a Mortgage Broker who talked a bit about her business. When she got to the qualifying ratios, it wasn’t 28/36, but 43/50. To compare to my numbers from the prior article, 43% is just about 1.5 times 28%, so this broker is saying this couple can borrow not the $372K I calculated, but rather, $558K. She was also pushing loans with as little as 3% down.
She was quick to point out that Real Estate Agents are not supposed to offer financial advice to clients, and that since she knew more than everyone in the room, we should just send our customers her way. (She literally said, “I know more about mortgages than any of you.” I decided it would be pointless to challenge her. We all just wanted her to leave so we could get through the material.)Â It’s interesting for me to see that these mortgages are even available, the bubble and crash aren’t even 10 years behind us. I can understand the downpayment is tough, and if a buyer with good income can qualify for a mortgage with a decent debt to income ratio, that’s fine. But the thought of selling someone a mortgage that will put their debt service to 50% of their gross income should be criminal, in my opinion.
I’ll leave you with one final thought. Say this $100K couple gets in too deep, and for 30 years skips the 401(k) matched deposit of 5%. $10K each year for 30 years will grow to $1.1 million at an 8% rate of return. I know, it’s not that simple, but when people get in too deep, something has to give. Would you be comfortable if the Mortgage Broker told you not to worry about having half your gross pay going to service your debt? I don’t think I’ll ever refer anyone her way.
I think this column is so important. I agree the brainwashing of less-than-formally-educated Americans continues. “You have to have a house. And you should put down as little as possible.” Ridiculous. I have a purchase agreement on my humble house. The buyer to whom I am selling is awaiting approval of his VA loan. VA loans eliminate the need to have PMI. He is putting nothing down. But, the VA may tack on as much as an extra 3% to the principal of the loan. I guess the extra 0 to 3% pays for the insurance should the borrower default. I think this is bad for veterans, not good.
You hit the nail on the head with this mortgage broker. I won’t mince words: They are dumb. They’re trained mechnically; they do not know the math. They have a huge eye turned towards making money for their companies. They have no interest in the financial well-being of their clients.
My humble neighborhood is rife with foreclosures. I guess the banks are doing fine because of the insurance on the mortgages. But the banks are destroying people’s lives. Aww, some will say, nice liberal sentiment. Baloney. I may vote Democratic but I am a hard-core capitalist. Destroy the neighborhood via foreclosures = destroy the property tax income to the county = reduced property values = worse schools = crime rises in the municipality = we all pay. And I do not buy that these folks should have known better. Seventy perecnt of the age 26+ population does not have a bachelor’s degree in the U.S.
I am delighted you are getting into the business, Joe. You could do something big. You could do something innovative. You could start a revolution in the way we build neighborhoods through mortgages.
Thank you for your kind words. As I just completed the 30 hours of 40, I have to say, it’s remarkable what real estate agents are not allowed to say. And since I will be working for the seller, I have a responsibility to him or her to sell the property for the best price I can get. This means asking for a pre-approval but not counseling the buyer away from the very thing I know is wrong. I love Nassim Taleb’s quote, “If you see fraud and do not say ‘fraud,’ you are a fraud.” Unfortunately, I am told that since these situations are legal, I am not permitted to say a word. In fact, I would lose my license as fast as I get it for warning people of this. This part of my my next career will not always be comfortable for me for this very reason.