As you grew towards adulthood, your parents probably drummed some no-nonsense rules into you that reverberate in your head to this day. One may be the warning to not get into anything over your head financially. It's the one that differentiates between how much you may be qualified to borrow vs. the size of the payment with which you may be comfortable.

The emphasis on maintaining good credit, practicing good spending habits, and constantly seeking ways to increase your income aren't new ones. So is it up to your home loan consultant to give you advice on whether you're getting in over your head when you buy a new home? The loan consultant is there to explain each loan program that interests you and that you qualify for based on your down payment ability, credit standing, and prospects for income, but let's face it. He is not a financial advisor. He can't tell you if what you're doing makes sense for you and your family.

What loan professionals explain to you (and underwriters examine) after sizing you up for a home loan is that the calculations they use to qualify you are actually a blueprint for how you will "divvy" things up financially in the coming years, following your new home purchase. Home lending institutions will take a risk using their own guidelines (and sometimes government-dictated guidelines) for lending money to people who have decent enough incomes, spending habits and credit. They do this using calculated loan "ratios" so that the amount of money left over after a house payment and other necessities, such as car expense, food, utilities, etc., is enough to sustain their borrowers in the long run.

The question you'll need to ask yourselves, then, is this: Is the discretionary income you have left over after your house payment and normal monthly expenses enough to feel comfortable with, even if it doesn't increase much over the next ten years or so?

Let's cite two hypothetical examples of buyers going into a new home purchase:

Scenario # 1

The first couple, the Johnsons, are a young couple eager to buy their first home. They have paid off whatever revolving debt they had, including student loans, to prepare them for this moment. They have carefully saved more than enough for a 10% down payment on a home in the $150,000 - $180,000 price range. They have also checked their own credit histories and "cleaned up" any questionable credit items. The new home sales person, after doing a preliminary assessment in her computer, has told them that their income qualifies them to buy one of their larger floor plans, base-priced at $180,000. This is exciting to the Johnsons. The "Emerald" plan that they may qualify to buy is their absolute favorite model home, with two stories and a huge kitchen. They try to imagine what it would be like to live in a home like this, considering that it's more than they thought they could ever have in a first home. They take the printout provided them by the new home agent and the glossy home brochure and go home to mull this over.

They figure that with the loan ratios that are considered guidelines for them on a fixed rate loan over thirty years, to get a home this expensive would mean that they should plan on about 33% of their current gross income as housing expense only (considered their top ratio). Aside from that figure they'll have the usual other expenses like transportation, utilities, etc, (considered, with the housing expense added to it, the bottom ratio), and would like to have to the ability to take a vacation once in awhile. When their calculations are finished, and taking into account that more raises and bonus income is probable, they feel that the purchase of the Emerald can become a reality for them. Even with a base price of $180,000, they can add some upgrades and feel comfortable with their house payment. So they go for the gold.

Scenario #2

Now let's visit the Bradfords, who love the Emerald plan, too. This would be their second home, the current one being a 2 bedroom townhouse they bought when they were just starting out. They stand to make a little profit from the sale of the townhome when they sell it, and along with their equity, will, like the Johnsons, will have a 10%-sized down payment for a home up to $180,000. So far so good.

They went a little "nutso" in the car-buying arena last year, and with their SUV and mini-van, the Bradfords have about $750 in car payments going out every month. They also have a few credit card payments and upcoming daycare expenses while Mrs. Bradford returns to her job. The builder's loan consultant has told them that, with their expected dual income they can qualify for the Emerald, so they are also excited at this point. They are picturing their little one playing in the backyard, becoming hosts for family gatherings, and eventually providing a little brother or sister.

As far as loan ratios go, the Bradfords, like the Johnsons, will have a 33% top ratio for housing expense. Their bottom ratio, however, stretches the limit of what their sales agent is telling them they can qualify for, resulting in less than $300 a month left over for a rainy day. Still, the prospect of living in the Emerald plan is really tempting. They figure their jobs are secure, and they could rely on family if an emergency occurs financially.

Then the Bradfords really begin to think and think hard. The purchase of this home, as wonderful as it sounds, means no more dinners out with friends, no vacations for quite a while, and not much time off work should a second child arrive on the scene. They'll have to go with the standard carpeting in the home (no upgrades) and won't be able to get around to putting grass in the back yard for at least six months. Their whopping car payments won't be over with for about four years, and they really don't want to add more credit card debt to buy the furniture they'll need. The Bradfords, sadly but perhaps wisely, pass on the Emerald, even though they are pre-qualified to buy it. They have made a personal decision that makes sense for them, deciding to pay off cars and credit cards first, and waiting until their income is such that they would not become devastated financially if Mr. or Mrs. Bradford took time off work for child-raising.

These are two distinct and highly personal types of scenarios. Both sets of buyers qualify to buy the Emerald, but both see their financial risks differently because of their own circumstances. The Bradfords may well have been able to handle payments for the new house, but they looked at what their quality of life would be if they had gone ahead with the purchase. The Johnsons, with careful planning, were able to buy the house of their dreams and still see a comfortable future.

Again, the moral of the story here is that what buyers can conceivably qualify to buy and what they can buy "comfortably" can be two completely different things. Buyers have the responsibility of ignoring well-meaning friends, family, loan consultants, and sales people to make a decision for themselves and their families that everyone can live with, no matter what input they are given. Being able to put emotion aside to deal with the rational side of a home-buying decision may very well prove to be one of the more difficult but thoughtful tasks accomplished in many people's adult lives.

Published: May 19, 2000

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A veteran of the real estate and homebuilding industries since 1986, Dena Kouremetis first joined Realty Times as a new homes writer in 1998. Since then, she has authored four books, written consumer columns on new homes issues for websites and newspapers all across the country, contributed to builder trade magazines, appeared as a guest expert on several radio shows and even created a ten-chapter podcast for LendingTree.com’s homebuilder website, iNest.com, now available on iTunes, entitled Uncharted Waters; Navigating the Purchase of a New Production Home. Kouremetis recently joined her local Folsom, CA Coldwell Banker office as a broker associate while continuing to write for the real estate industry. For the past three years, she has been training real estate agents for both the resale and new homes industries, putting her experience, research expertise and gift of expression to work to help others entering the business.