Question: I earn $140,000 a year and am renting in Connecticut. We had saved a lot of money for a down payment on a home but we lost most of the value when the stock market tanked. I have been looking into loans with very little money down and was surprised to find that there are lots of lenders who will give me a large loan with a huge monthly payment. Property values keep rising and time is running out. I have two questions. First, is the recommended debt-to-income ratio of 36 percent outdated? When I apply myself to this rule, I have no money left. I have two car payments, child care expenses, and other household expenses just like most normal American families. I don't think my expenses are outlandish even though they seem to add up. Second, why do property values keep going up even though people can't afford the homes? I believe the banks are lending too much money and this is what's causing property values to skyrocket.

Answer: Let me give you my thoughts on both of your questions separately.

The debt-to-income ratio of 36 percent is not outdated. In fact, most lenders will allow your total debts to exceed 36 percent of your gross monthly income. But lenders only count certain things as debt for this ratio. Lenders consider mortgage payments, car payments, credit card bills, student loans and other long tern debt when calculating your debt-to-income ratio.

Lenders do not include household expenses such as childcare, insurance, groceries, entertainment and so forth. I have said this a million times: It is not up to the lender to determine how much of a mortgage payment you can afford. It's up to the borrower. Remember that the lender doesn't care if you can't afford your childcare expense or a meal at a restaurant. A lender only cares that you make your monthly mortgage payment.

It's up to the borrower to know his or her spending habits and monthly expenses and consider these expenses when determining an affordable house payment. In your case, it obviously needs to be less than 36 percent of your income.

Underwriting guidelines are designed to determine the probability of prompt payment of mortgage debt. And the debt-to-income ratio is only one criteria. For example, let's assume we have a mortgage applicant whose debt-to-income ratio is 35 percent - within the lender's guidelines. He has fair credit and is putting down only five percent. He has no significant savings and lots of credit card debt. His new mortgage payment will be twice his current rent.

The lender may reject his application. Even though his debt-to-income ratio falls within the lender's guidelines, the rest of the story suggests that he might be going in over his head on a mortgage payment. He has no history of saving money. In fact, he's up to his neck in credit card debt. So the underwriter is thinking, "how's this guy going to be able to afford a house payment twice as much as his rent when he can hardly afford his rent right now?"

It's never the responsibility of the lender to determine how much you can afford. That's up to the borrower himself. And when he arrives at that number, he needs to see if there are any lenders that will make him a loan. The higher the number, the more difficult it will be to get a loan.

If you don't know where to start, an experienced loan officer should be able help you determine a payment range that is compatible with your income, debts and spending habits.

Regarding your second question. Property values are increasing because people can still afford them. Housing prices are a function of supply and demand and right now we have lots of demand and less supply. I think it's inevitable that demand will eventually diminish as prices reach a saturation point. This will curb housing prices. But I don't believe the abundant availability of mortgage money has a significant impact on housing prices. If these new homeowners are indeed taking out unaffordable mortgages, we'll know soon enough by the skyrocketing default rates.

Published: June 14, 2002

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, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.