Should You Stretch Yourself When Buying a House?

Posted on January 10 2007

There is a recent trend going on that encourages people to stretch their mortgage to an uncomfortable payment amount. This trend stems from the recent low interest rates we have seen the past few years.

If you have gone through the home buying process you know that in many cases realtors want you to purchase larger more expensive homes for commission reasons while the lender is in cahoots knowing that if you purchase a more expensive home they will incur larger fees and more interest. Lenders also know that your mortgage is the most important expense you will probably have so intern you will place a greater priority on making your monthly payment even if it means falling behind with all your other creditors.

Traditionally if you were to walk into a bank to become qualified for a mortgage, your lender would allow you to lend somewhere between 26% and 28% of your total pretax monthly income. This percentage includes your housing costs and is referred to as the PITI – Payment, Interest, Taxes and Insurance. Today in most lending institutions they will allow you to go as high as 33%. It is not uncommon these days to find lenders that will even finance up to 60% of your monthly pretax income.

If you have ever spoken to someone that has been “house poor” you will know that there is psychological, emotional and financial ramifications associated with extending yourself.

Many people are being told you should extend yourself when purchasing a home because within a few years you should be bringing home additional income in which the payment will be easier to make. This is not always true though as we know their really is no guarantee. If you were to loose you job chances are you would not have the reserve to withstand making your monthly payment and ultimately loose your home.

Another drawback to extending yourself with your mortgage payment would be that you are unable to keep up with the scheduled maintenance. Traditionally you should budget 1% of the value of the house each year for the cost of maintenance. If you don’t keep up with maintenance your house will begin to lose value.

I would encourage you while shopping for a home not to extend your PITI to 25% of your total income each month as this will allow you to enjoy life. If you are considering purchasing a new home and you feel you may be extending yourself, try to save the difference in payment for a few months. If you are able to do this without feeling “house poor” it may be a good decision. If you are finding it a struggle you will probably want to reconsider.

If you have questions whether you will be extending yourself I would encourage you to contact your local non-profit homebuyer counseling agency. These agencies are a neutral party in the home buying process and often require minimal fees for evaluations.

-Joe Larson FLCS Certified Credit Counselor