How much debt would you be willing to carry to achieve home ownership? For an increasing number of home buyers, the answer is nearly half of their monthly income. According to a recent report by CoreLogic, as published in the Wall Street Journal, 1 in 5 home buyers have debt-to-income ratios of 45% or more.

This is the highest percentage of heavily-leveraged home buyers since the run-up to the housing bust. While there’s some concern among industry analysts, the general consensus is that today’s buyers have better credit scores, and therefore represent less risk, despite the uptick in debt loads.

The rising debt levels follow the loosening of mortgage underwriting standards by Freddie Mac and Fannie Mae during 2017, which allowed borrowers to have debt-to-income ratios as high as 50%. This ratio refers to “back-end” DTI, meaning that the debt load calculation includes the new mortgage payment, as well as any consumer debt payments, such as car loans, student loans, credit card payments and so on. (Read more about mortgage financing in our free e-book, “How to Buy a Home like a Pro!”)

In essence, it’s “ok” by this underwriting standard to devote half of your gross monthly income to making debt payments! The problem is, gross income is not the same thing as monthly take-home pay. What may sound workable on paper, may not be a comfortable, practical or wise situation for home buyers to place themselves in.

To their credit, Freddie Mac and Fannie Mae increased the allowable DTI ratios to help more home buyers stay in the market. Rising home prices and rising mortgage interest rates have crimped home affordability around the country. As a result, average mortgage payments have risen by 5% during the first quarter of 2018, compared to the same period a year ago. Economists expect that average mortgage payments will rise by 10% or 15% by the end of the year.

While home buyers may be tempted to do “whatever it takes” to buy a home, you must think twice before accepting indebtedness that could hurt your ability to save for emergencies, or put away money for retirement and other needs. If you are marginally qualified to buy a home now, you might be better off paying down others debts first, or saving longer to make a larger down payment. Plan well, and buy smart! You’ll thank yourself later!

As your Exclusive Buyer’s Broker, we serve your best interests at all times! Unlike real estate agents and brokerages who represent sellers, as an Exclusive Buyer’s Broker, we only represent you, the buyer, getting you the best price and terms with no conflict of interest at all times.

Understanding this distinction could literally save you thousands of dollars not only on the purchase price and terms, but also on seller concessions and home inspection issues, whether you are a first-time homebuyer or an experienced homeowner!

Contact us with your home buying questions! Remember, we are with you every step of the way…all the way home!

Andrew Show
Broker, CEBA-M, CNE, CSP, PSA, e-PRO, CREM, ABRM, AHWD
Buyer’s Resource Realty Services, www.buyershome.com
Serving Metro Columbus, Ohio with Exclusive Buyer’s Agents
7100 North High Street, Suite 204, Worthington, Ohio 43085
614-888-4110 | 888-888-4110 Toll Free | 614-839-4110 Fax