The debt-to-income ratio: How much house can you afford?

Housing is the largest expense in the budget of most families. But how much is too much to spend on shelter? An article in Saturday's New York Times contains a shocking example of one woman who crossed the line:

What she got was a mortgage she could not afford. Toward the $385,000 cost, [Christina] Natale made a down payment of $185,000, a little less than what she took away from the sale of her grandfather's home. The loan that made up the difference, with closing costs, broker's fee, taxes and insurance, meant a monthly bill of $1,873.96, about $100 less than her monthly take-home pay as an administrative assistant.

I am not unsympathetic to tales of financial hardship, but this stretches even my compassion. Ms. Natale (who has three children) took out a housing loan that left her just $100 a month for every other expense in her life. She shouldn't need an outside voice to tell her that this was an impossible situation. (All the same, where were the outside voices?)

Although this is an extreme example, many other people buy homes only to discover they're in over their heads, unable to make payments. How can you prevent this from happening to you?

Debt-to-Income Ratio

Fortunately, decades of financial data have produced computerized models that help to determine how much a person can afford to spend on housing and debt. To learn more about this, I recently spoke with Robb Severdia of Guarantee Mortgage in Portland. I asked him to describe how the process works. (If I have anything wrong here, it's my fault, not Severdia's.)

Traditionally, lenders have used the debt-to-income (DTI) ratio to estimate how much a homeowner can afford to borrow. This ratio is computed by comparing your expenses to your gross (pre-tax) income. The lower the number, the better. If you make $3,000 a month before taxes, and you pay $300 toward debt, your debt-to-income ratio is 10%.

Banks and mortgage brokers look at two numbers:

  • The “front-end” debt-to-income ratio, which includes total housing expenses: mortgage principal, interest, taxes, and insurance.
  • The “back-end” debt-to-income ratio, which includes all of the above plus other debt payments: auto loans, student loans, credit cards, etc.

When a prospective borrower submits her paperwork, the computer evaluates it, applying statistical models to be sure the proposed debt load falls within accepted ranges. After this automated process, the loan proceeds to manual underwriting, where a human screens the application and makes the ultimate determination to approve or deny the loan.

Industry-standard debt-to-income ratios drive this process.

Lending Limits

When we bought our first home in 1994, everyone involved in the transaction told us that our front-end debt-to-income ratio should be 28% or less. That is, we should pay no more than 28% of our gross income toward housing expenses. The back-end ratio was 36%, which meant that our housing expenses and debt payments combined should total less than 36% of our income.

Example: Our gross (pre-tax) income in 1994 was roughly $60,000, or about $5,000 per month. To stay under the 28% front-end debt-to-income guideline, we could afford housing expenses of no more than $1,400 per month, including insurance and taxes.Because Kris had student loans and I had credit card debt, we couldn't get close to the 28% front-end DTI ratio because it would push us over the 36% back-end. Our high debt-load meant we had less to spend on a house. Our eventual payment was $1,086 per month.

When we bought our new home in 2004, the debt-to-income ratios had changed. “That 28% figure is old,” we were told. “Most people can go as high as 33%.” The back-end ratio had been raised to 38% — and even to 41% in some models!

From what I understand, debt-to-income guidelines have gradually become more relaxed over the years. Here's what I could puzzle together about the history of DTI (I would love to have clarifications or corrections to this list):

  • Reportedly, during the 1970s (before credit-card debt became common), DTI wasn't split between front-end and back-end. There was only one ratio, and it was 25%. If your mortgage, taxes, and insurance were less than 25% of your income, it was assumed you could afford the payment.
  • In The New Rules of Money, Ric Edelman writes that the lending limits “used to be” 22% and 28%. I'm guessing that this must have been the rule-of-thumb during the 1980s.
  • When we bought our first home in the mid-1990s, the front-end ratio was 28% and the back-end ratio was 36%.
  • By 2004, those ratios has increased again to 33% and 38%, respectively. (To qualify for an FHA loan, your front-end DTI is limited to 29%, and the back end is capped at 41%.)

A 5% increase may not seem like a big deal, but when you're talking about a house payment, it's huge. Remember: 5% of a $60,000 income is $3,000 per year, or $250 a month. Many foreclosures occur because people take on housing payments that are as little as $250 a month more than they can afford.

Afraid to Say “No”

During my conversation with Robb Severdia, I asked him about the growing debt-to-income ratios. He acknowledged that he'd seen the numbers rise during his decade in the industry. “Banks feel they need to increase the limits in order to be more competitive,” he explained.

“I think that in most cases, it's a bad idea for borrowers to push that 41% back end,” Severdia said. “It might make sense in some instances, but it can be a recipe for disaster.” In other words, give yourself a margin for error. Instead of basing your home budget on a 33% front-end debt-to-income ratio, consider dropping that to 28%. You won't be able to afford as big of a mortgage, but you won't feel as pinched by the payments, either.

I asked Severdia how people like Christina Natale from the New York Times story were able to get mortgages that amounted to more than half their income. “People are afraid to say ‘no',” he told me. “They were afraid to lose the deal.” Thus the subprime mortgage crisis.

In The Automatic Millionaire Homeowner, David Bach warns:

You should generally assume that the amount the bank or mortgage company is willing to loan you is more than you should borrow. […] Don't fool around with this. Do the math. Be realistic about your situation. Don't pretend you're in better shape than you really are.

Nobody cares more about your money than you do. Your real-estate agent, your mortgage broker, and the bank all have a vested interest in encouraging you to buy as much house as possible. Their incomes depend upon it. Listen to what they have to say, but make your decisions based on your own knowledge of the situation.

Better Safe Than Sorry

Homeowners are often admonished to “buy as much house as you can afford”. There's some merit to that statement — in general, housing prices do increase, as does personal income. As a result, your mortgage payments generally become more affordable.

The problem, of course, is that when you buy as much house as you can afford, you're left without a buffer. What if you lose your job? What if you're forced to sell your home, but housing prices have dropped? I think it makes more sense to buy as much house as you need, keeping the conventional debt-to-income ratios as ceilings.

Ultimately, it doesn't matter what the guidelines are. What matters is what you can afford, what you're comfortable paying. Just because conventional wisdom says you can take out a $1400 monthly housing payment on your $60,000 annual income doesn't mean you have to do it.

Foreclosure photo by respres.

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Penny
Penny
11 years ago

When we bought our home two years ago, we were prequalified to purchase a house costing over $600K and our realtor kept encouraging us to look at expensive homes. Looking at a realistic budget and doing my own Realtor.com research, I set $350K as our ceiling and we eventually purchased a lovely home for $330K. We could have purchased a small mansion with the loan the bank urged on us. And when our other home didn’t sell, and housing prices crashed, and traveling every week for my job became a huge strain, we would have been trapped and in a… Read more »

Alan Cordle
Alan Cordle
11 years ago

I don’t want to defend Natalie other than to say there are some people — for a variety of reasons — who are so bad at math, that I can understand how that happened. I work with some students who appear to shut down when confronted with anything connected to numbers. And so ultimately, the lenders (your outside voices) are responsible for setting limits — and I blame them for the mess the U.S. is in now.

April
April
11 years ago

We are in a mess right now and our mortgage is part of it. It sucks. We bought a house we could afford and then our payments went up about a year after we bought it…so now we are scraping month to month to be able to make the payment. Sometimes even when you stick to the budget in the beginning things can get out of your control.

Tony Dobson
Tony Dobson
11 years ago

My Mum used to be a Building Society manager in the UK before she changed careers (of her own choosing). Based on her experience, she told me that I’d be able to get a mortgage for 3x my annual salary when I applied for my first mortgage (1998). I was actually told I could get a mortgage (by myself, no spouse at that time) of 3.5x my annual salary. A few years ago I couldn’t believe that banks were reportedly offering mortgages of 5x annual salary. In my opinion the banks got greedy – as mentioned in the article they… Read more »

Nathan
Nathan
11 years ago

Great Post J.D. its nice to see some information on the basics for new home buyers. As for Natale boo who she was either greedy or just plain dumb when it came to the deal on her home. People need to start taking ownership for their decisions and look at the impact of the choices they make clearly Natale did not take this time

Jeff C,
Jeff C,
11 years ago

Around 2000, we applied for a HELOC and I was a bit concerned that our debt to income ratio would be close to the 36% level. They told me “no problem.” A HELOC ratio could be up to 50%. Even in my spending days, I was shocked by that.

Momma
Momma
11 years ago

The lower your mortgage payment, the more money you have for other things, including paying down debt! I agree, it doesn’t matter what is “suggested” as an affordable mortgage… do yourself a favor and get a cheaper house with a lower payment. It’s been a lifesaver for us, and has allowed me to be at home/work out of the home part-time!

Traciatim
Traciatim
11 years ago

Kind of an aside to Tony Dobson’s comment, how does the debt to income ratio calculate in to the rule of thumb of “You should spend between 2-3 times your income on a house” or “You should spend 2.5-3.5 times your income on a house” depending on who you ask. For instance, if you spend 2 times your income on your house, at current mortgage rates, what does that equate to in the debt to income ratio?

guinness416
guinness416
11 years ago

The shame in the Staten Island woman’s case is that she seems to have had a nice lump sum of savings to hand. That could have helped her transition somewhat comfortably to life as a single woman – and a renter.

I wanted to spend $300k on my house, but the real estate agent kept showing us places listed way beyond that. It can be tough, even for someone with the smarts and pigheadedness that I have, to maneuver through the home buying process. Everyone else involved are such vultures.

Mer
Mer
11 years ago

When I started in banking the dti ratio was 28 front 36 or maybe 38 back depending on variables such as credit score, amount of reserves, amount of down payment, etc. When I left banking the back ratio was 55. (This will differ by lender) I am not joking. The ratios are done on gross income (not net) and the back ratio is only using debts, not food, gas, child care, car insurance, co-pays for medicine or Doctors. The front ratio includes your PITI= principle, interest, taxes and insurance. The back ratio includes this plus the debts that show up… Read more »

cyergal5184
cyergal5184
11 years ago

In the last paragraph of this article, it states the woman wants to study accounting. If she is really this bad at math, she should save her money. Although I guess she could be an accountant for the government since they use the same fuzzy math.

Char
Char
11 years ago

I too have a bit of sympathy for Natale for a couple of reasons. 1. Many of us were brought up to believe that bankers were “important people” “smart people” and so you would assume that you can afford the payment if they said you could, especially if you were very dependent and poor with numbers. 2. Years ago we were very young and buying our first house, we asked THE banker (my mind – “important person”) how much we could afford to pay for a house since I am not a “numbers” person. I began telling him that we… Read more »

SteveF
SteveF
7 years ago
Reply to  Char

Just reading some of these horror stories has me scared to death about buying a house now. I make about 3k more than I made 3-4 years ago when the market was booming and it seems, living in central california, I can’t get anything because of everyone with cash…but also just terrified of getting screwed over in the end. I want to buy a house…my girlfriend wants me to get a house…my parents want to help me get a house, but I’m so scared right now and just want to stay in my apartment.

Someone
Someone
11 years ago

I bought my first home this summer, amid warnings that lenders had “tightened up a lot” and that it was now “very, very difficult” to get a mortgage. Yet, not one lender I talked to had the slightest hesitation in their willingness to pre-approve me for the absolute maximum amount that I felt I could afford to borrow. It makes me kind of frightened about what they were “tightening up a lot” from. I never understood the ARM mortgages. Why on earth would someone take out a mortgage where they don’t even know what the rate will be in a… Read more »

Paul Williams @ Crackerjack Greenback
Paul Williams @ Crackerjack Greenback
11 years ago

J.D., I totally agree with your advice. We should only buy as much house as we need. What are you going to do with the extra if you buy the most you can afford? It just means more maintenance and upkeep. @Alan Cordle (#2): I’m sorry, but it doesn’t matter if you don’t like numbers. You are responsible for your own situation, and you can’t blame others for not telling you any better. I totally agree with what Penny said in the first comment. “Personal finance means personal responsibility.” And J.D.’s maxim of “Nobody cares more about your money than… Read more »

MBirchmeier
MBirchmeier
11 years ago

@Traciatim:

Assuming taxes/insurance on the house cost about 2.5% of the value of the home annually (A bit high but I’m being conservative), given that interest rates are 6.06% currently, yields a 29.2% DTI ratio on a house 3*Income assuming no other debts.

To get an idea of where that 38% DTI number really is, with a 15 year mortgage (5.71% interest rate currently) the house being 3*Income still only brings us to a 37.4% DTI ratio.

Traciatim
Traciatim
11 years ago

I actually did a little math based on a 50K salary and a mortgage of 100K – 175K @ 6.25% over 25 years (Normal for Canada), and it looks like this with estimated taxes, and insurance based on my own rates:

100K Mortgage, 21%
125K Mortgage, 27%
150K Mortgage, 32%
175K Mortgage, 37%

Looks like the 2 – 3 times range is pretty solid for affordable housing. Rules of Thumb FTW!

pd
pd
11 years ago

This is such a timely post for me. I’m currently looking to buy my first home in Washington, DC, and even though this purchase is a long-term investment, the temptation to “stretch” my budget is something I’m valiantly trying to avoid. 🙂

I also second what #13 says. I haven’t noticed a lot of tightening by lenders from my end — but that may have to do with how attractive your credit score is. Mortgage lenders I’ve talked to are very excited to see scores that are 720+.

Pearl
Pearl
11 years ago

I was shocked when my fiance and I bought our first home several years ago. We were pre-qualified for a mortgage nearly 5 times our annual income. I had initially assumed that the figure was so unreal because my fiance is an attorney, but it now sounds like this was standard practice. We laughed out loud when they told us the mortgage we could “afford” and refused to look at any homes over 1.5x our annual salaries. (Our realtor was rather shocked herself!) It was hard; there was at least one home over our budget that we strongly considered, but… Read more »

Sam
Sam
11 years ago

When I bought my first home, back in 1999, and didn’t know much about real estate I got some great advice. First, figure out how much house I could afford on my own (using an online calculator) and making sure to include insurance and taxes and my other debt (at the time student loans/personal loan and credit card). Second, shop around for a mortgage and get preapproved. Of course when I did that I already knew how much I could afford and ignored the huge numbers I was preapproved for. Third, I worked we a good real estate agent and… Read more »

TosaJen
TosaJen
11 years ago

These kinds of articles remind me why I think it’s important to teach my kids the ways of capitalism. We have to think for ourselves and remember that the motives of banks and retailers and manufacturers and corporations is NOT to make my life better. It’s to make money. Sometimes I feel like an evil mother raising jaded and cynical children. Every time I take my kids to a store, we review the idea that commercials aren’t aimed at their best interest, and anyone who tries to sell them something is doing it to earn money, not because they care… Read more »

KC
KC
11 years ago

I must be ultra-conservative. Our first home (we currently live in) was expensive to us at the time, but quickly became very affordable. Now 9 years later its only 14% of our income. I love the flexibility it gives us. Now we are moving to a different state and buying our “forever” home – which is much larger. I’m concerned over the increse in our mortgage payment, but its still only going to be 20% of our income. Everyone is different, but I know if I have an extremely affordable home I can afford other things. I can fix my… Read more »

Gooniette
Gooniette
11 years ago

My husband and I just bought a house last month. Our lender told us we could afford up to $350,000 with a 33% DTI. The payment would have been about $1,700 total, I think. We bought a house for $190,000 and although it needs some work, we have the money each month to spend on it and our payment is a little less than $1,100. I left the mortgage industry a couple of years ago and saw ratios go up as high as 45%. These brorrowers were expecting to own the house for a couple of years and then sell… Read more »

Mr. ToughMoneyLove
Mr. ToughMoneyLove
11 years ago

JD – This post should be mandatory reading for all loan underwriter trainees and first time homebuyers. Everyone should practice saying “no” to numbers that don’t fit. Also, Fannie Mae, Freddie Mac, and FHA should have strict ratio requirements than cannot be waived or circumvented under any circumstances. We need to take those decisions out of the hands of realtors and lenders who cannot think beyond making the sale.

Kevin R
Kevin R
11 years ago

Am I the only one shocked by how much the monthly payments were on the loan mentioned from the NYT article? For a $200,000 mortgage, nearly $2000 a month seems ridiculous. I could be off base since I’ve been looking at mortgage rates in today’s market, but maybe Ms. Natale’s biggest problem wasn’t a house she couldn’t afford, but that she didn’t shop around for better mortgage rates and broker fees!

lidia
lidia
11 years ago

I have to admit, we got a little wrapped up in the subprime enthusiasm. Mostly because we live in Southern CA and none of the rules you have described apply here if you ever want to own a home in a reasonable area of LA (although things are shifting quickly). Once the rules loosened it seemed like we could finally own something and stop giving money away to landlords; flawed logic I know, but there’s a lot of propaganda in this country about house owning. And a LOT of tax incentives for property owners. Luckily nothing worked out and we… Read more »

Tordr
Tordr
11 years ago

I did not know about the mortgage being 36% of take home pay. I am more used to the rule that your mortgage or total mortgage payments should not be more than 2,5 times what you earn in a year. Although this rule seems to have crept up to 3 times what you earn these last years. This probably comes from the fact that in Norway almost all have variable rate loans, not fixed rate. I was fortunate that I could make a sizable down payment on my house, but still I must have been close to the 36% rule… Read more »

Elizabeth
Elizabeth
11 years ago

I agree that the rates seem outrageous. What is even more disturbing is that the employees in the industry worked on commission. So for every person that they sold a larger loan to they got a larger paycheck. In my opinion this is criminal and they should be prosecuted – not bailed out!

Every person is responsible for their own finances – but it doesn’t change the fact the government is currently rewarding what I view as criminal behavior.

Jane
Jane
11 years ago

I want to have compassion for this Natale woman as well, but it’s hard. She now receives money from the New York Times’s Neediest Cases Fund, a charitable fund which they urge me and other solvent readers to contribute to. I’m sorry that this woman lost her down payment, but the NY Times needs to find more clear cut charitable cases for me to want to give. I feel most for her children who suffer because of adult stupidity.

Pascale
Pascale
11 years ago

wow, that’s an amazing story. hard to believe Natale got such a loan. In France, you cannot have a loan that’s more that 33% of your net income. to have a bigger loan, you can get more years. So we can get loan from ten years long to 30 years long. It seems moere logical for me. I can’t really understand the 3 times your annual income thingy, as it doesn’t show any concrete view of your day-to-day financial budget. and the tip about trying to get more into the 28% range is so good. you can even try to… Read more »

Alan Cordle
Alan Cordle
11 years ago

@Paul Williams (#14): I did not say, “doesn’t like numbers.”

There are people who simply cannot process — mentally — numbers. Should those people never be able to purchase a home? Or should a responsible lender realize there are all kinds of people applying for loans and that as lenders THEY should follow simple codes of ethics?

Donna
Donna
11 years ago

Natale’s problem was not a financial one, but a psychological one. Mentally, she was relying on other people (the ex, the “Prince Charming”) to support her. Reality? Women these days have to be prepared to live and support a family solely on what they themselves earn. In making long term financial decisions one should not rely at all on child support, alimony or any other type of ex support. What happens if the ex loses his/her job? Best to make financial decisions based solely on what you bring to the financial table — treat the rest as gravy and put… Read more »

Wayne
Wayne
11 years ago

Two thoughts: First, outside voices don’t intervene often because we, as a society, discourage it. That is, for some reason, it’s not okay to discuss how much one’s house costs (despite it being public information, see zillow.com). It’s also taboo to ask how much someone makes per year, although many of us are in the same price ranges as our friends. Add to those the fact that we idolize those who live big and rich, often encouraging each other to live that way, and you have a recipe for a lot of debt and nobody wanting to talk about it.… Read more »

EileenT
EileenT
11 years ago

I don’t care what a mortgage lender wants to lend me, I do not want a mortgage payment that is more than 25% of my TAKE HOME income. This is especially important to remember if you have kids and all the expenses related to raising them. If your mortgage payment is only 25% of monthly TAKE HOME pay, then you will have plenty left over for child care, emergency savings, groceries, home maintenance, car expenses, vacation, pet care, etc. etc., etc. If it is more than that, you will feel very pinched each month. When we bought our first house… Read more »

TheAntiChick
TheAntiChick
11 years ago

I’m one more who had the lenders and the real estate agents trying desperately to push me to a house I knew I couldn’t afford. My numbers came up with something like $275k for a mortgage, but my numbers said I could afford something in the $130k range. I ended up stretching a bit for $135k because we found a house with just the right layout and school district, but much smaller than the real estate agent was pushing us toward. They thought I was nuts. I also wouldn’t consider anything but a fixed rate mortgage. But when my husband’s… Read more »

squished18
squished18
11 years ago

“There’s some merit to that statement – in general, housing prices do increase, as does personal income.”

As I understand it, housing prices only increase if the average personal income of that geographic area increases. Housing prices are only a reflection of how productive its residents are. If the residents become less productive (economic contraction, health problems, working less), then house prices of that area will drop. If real (after-inflation) personal incomes drop in a particular area, so will housing prices.

squished

Steph
Steph
11 years ago

The comments here, taken altogether, are a reminder that personal finance blogs attract readers who understand personal finance to some degree. Even if you’re just beginning to pay attention, you *are* paying attention and that makes all the difference. I work with people who absolutely could not calculate the DTI ratio without being led through it. These same people probably don’t know how much they gross and don’t understand their paycheck stubs. They don’t know how to find a percentage and they don’t know how to gather the data from their own records to start the problem. They aren’t stupid,… Read more »

SF_UK
SF_UK
11 years ago

I prefer the n x income method (between 2 and 3.5 depending on who you talk to). The difference in this is that it takes into account possible changes in interest rates (they were well into double figures when my parents bought, and could go there again). Of course, ideally, you’d work out what your outgoings would be at different interest rates (be pessimistic), and figure it out from there.

Joe
Joe
11 years ago

To me it should be 28% and 36% of your after-tax income allowing ample opportunities to save.

Rachael
Rachael
11 years ago

Bad with numbers? Are you serious? No way. No way, no how. If you are so bad with numbers that you seriously cannot manage a simple subtraction problem (my salary minus my mortgage leaves how much?) then no, you should not ever buy a house. At that point, you really shouldn’t have kids, either. (They require quite a bit of math as they grow older.) Frankly, I’m not sure how you’re holding down a job, managing your other bills, or going to the grocery store to buy food. I have absolutely no sympathy whatsoever. I had a subprime loan in… Read more »

The Tim
The Tim
11 years ago

…and now you know where the housing bubble came from.

Carla
Carla
11 years ago

Where we live (rent) now, the average home is still around $800,000. We just saw a two bedroom, two bath home listed for $900,000 in our neighborhood that probably will be sold in the next month. Because of this and the fact that we don’t want to live in a cheaper, less safe, less aesthetically pleasing area where we can buy a “short sell” home and at the same time worry about getting shot by a stray bullet while we are sleeping, we are packing up and moving north (northwest — OUT of California) where we can find a place… Read more »

Adam
Adam
11 years ago

I am saddened by the people honestly defending full-grown adults who lack the ability to do math at a third grade level. Even people with learning disabilities can manage this. Hell, even first graders understand how to take apples out of their pile, and when they will run out.

This is nothing more than another case of someone using money they didn’t have.

bethh
bethh
11 years ago

I am single and make 60k and live in the Bay Area and refuse to have a long commute. Ergo, I will likely never own! Or, I’ll have to leave this area (and believe me, I’d be fine with that). I lived in Portland from 1996-2006 (yeah, missed a housing rocket, but wasn’t ready to purchase) and have been waiting for this crash for a long time. What kills me is that whole industries are acting shocked that this run-up is having major consequences. I’m actually really angry about the state of the housing market, and being priced out so… Read more »

Josh
Josh
11 years ago

I rent, and my rent costs are about the same as 28% of my gross. Does that mean that it’d be more economical for me to look at owning if I can find housing that would also be in that 28%?

Adam
Adam
11 years ago

I know what you mean Beth(h?). I live in Monterey, California, and when I hear the two to three rule I almost laugh out loud. You can not buy a cardboard box for that much around here, much less the lot for the box to sit upon.

I think, more than likely, this rule of thumb was invented back when it was much more feasible. Back before we had well over 300 million Americans. Back before everyone ran their lives on credit.

Carla
Carla
11 years ago

@bethh – I am posting from the SF Bay Area; Berkeley/Kensington area.

@everyone – After reading the comments here, I have just learned NEVER to admit to my weakness, vulnerability, and struggles when it comes to math to anyone ever again – on or off line. Thanks for that lesson!

Janet Knox
Janet Knox
9 years ago
Reply to  Carla

Carla,
I am a high school math teacher. You should not be made to feel badly about a weakness in math….we are all gifted in different areas!! To those who have trouble with math, get a trusted friend to help you.

Cathy
Cathy
11 years ago

While Natale is ultimately responsible for her mistake, under no circumstances should predatory lenders be excused. Unethical behavior should not be rewarded. A couple of years ago I was looking at buying a condo. In the end, I decided I could not afford it. However, the lender was very persuasive and tried several times to convince me that I could actually afford it, and there would be absolutely no problems with refinancing later. As the past year has shown, this was false. I don’t think the lender was deliberately misleading – she could not have known she would have been… Read more »

Camilla
Camilla
11 years ago

I can see how she justified taking the leap, as I did something similar. Notice that her apartment rents for $1400/mo. For just $400/mo more, she could be putting that money towards something she owned. (She probably didn’t fully calculating the property taxes & other home owner expenses.) Natale inherited a lump sum of cash, enough for a downpayment. If she moved into a rental, she might never have a chance to afford a downpayment again. The article said she was hoping for a 2nd job or something to stop the gap. Surely her grandparents (who left her the $)… Read more »

Andrea >> Become a consultant
Andrea >> Become a consultant
11 years ago

The bank probably didn’t walk her through all the numbers. They may have even said, “Well, that $1800 a month is better than paying rent, because you’re getting equity. You’re essentially paying your rent, but you’re getting $400 or $500 a month in equity. And, at 3% annual inflation, that $1400 a month rent will be $1625 a month in five years. If you get a mortgage, you can just refinance for another 25 year term (or 40 years or whatever).” Note that her new apartment is $1400 a month. She’s still going to have to pay out utilities and… Read more »

Caleb Nelson
Caleb Nelson
11 years ago

About 2 years ago, I was in the market to buy my first home. I was looking to get a 1 or 2 bedroom condo. In the DC area this meant, I was planning on purchasing at least $230,000 worth of home. My income at the time was a little over $50,000 a year. My payments would have been around $1700 to 1800, because I had no money to put down on a house. Luckily, some strong influences in my life suggested that I wait a couple of years for 3 reasons. (1) I could save up a down payment,… Read more »

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