Cal­cu­lat­ing a re­al­is­tic mort­gage bur­den

The Washington Post Sunday - - BUSINESS - Michelle Singletary

When my hus­band and I were shop­ping for our first home, real es­tate folks kept telling us how much we could af­ford.

They would look over our gross in­come fig­ures and de­clare that we weren’t shop­ping for “enough” house, mean­ing their num­bers said we could af­ford a larger mort­gage.

But my hus­band and I did our own cal­cu­la­tions — us­ing our net monthly in­come — to fig­ure out what we could com­fort­ably af­ford. We wanted to still be able to tithe, save for re­tire­ment, pay for the fu­ture ed­u­ca­tion of our chil­dren and pro­vide monthly fi­nan­cial sup­port formy dis­abled brother.

Since the re­cent fi­nan­cial cri­sis, there have been a lot of ef­forts to make sure peo­ple un­der­stand the home-loan process and can de­ter­mine how much of a mort­gage they can truly af­ford. As of Oct. 3, lenders are us­ing sim­pler forms cre­ated as part of the “Know What You Owe” ini­tia­tive by the Con­sumer Fi­nan­cial Pro­tec­tion Bureau (CFPB). The new forms are de­signed to help bor­row­ers lo­cate key in­for­ma­tion and make it as clear as pos­si­ble how much debt they are sign­ing up for.

Although I def­i­nitely sup­port the sim­pli­fi­ca­tion of the loan process, I think peo­ple should be fa­mil­iar­ized with this in­for­ma­tion long be­fore they go house-hunt­ing, let alone ap­ply

for a mort­gage.

So, for this month’s Color of Money Book Club, my se­lec­tion is for you fu­ture home-loan shop­pers. And it’s free.

I want you to down­load and read the CFPB’s “Your home loan tool­kit: A step-by-step guide.” Go to www.con­sumer­fi­nance.gov and search for “Your Home Loan Tool­kit.” There’s also a ver­sion in Span­ish.

As part of the loan process, lenders are re­quired to give you a copy of the guide as well as two new dis­clo­sure forms. Here’s one thing I need to point out: You might see the tool­kit book­let branded with a len­der’s own logo. Nonethe­less, it’s cre­ated with the bor­rower in mind. You’ll be walked through var­i­ous mort­gage terms with ex­pla­na­tions that I think are user-friendly.

The elec­tronic ver­sion has fil­l­able text fields and in­ter­ac­tive check­boxes so you can save and print the in­for­ma­tion.

As you read through the book­let, you’ll see some sym­bols to drive home cer­tain points. When you see a pen­cil, you’ll have an op­por­tu­nity to face the num­bers. But be mind­ful: The book­let’s work­sheets are based on your gross in­come fig­ures. Please do whatmy hus­band and I did and use your net monthly in­come. Or cal­cu­late it both ways.

You’ll be asked to write down the es­ti­mated prin­ci­pal, in­ter­est rate, mort­gage in­sur­ance (which is of­ten re­quired for loans with less than a 20 per­cent down pay­ment), prop­erty taxes, home­owner’s in­sur­ance and as­so­ci­a­tion fees. Add all that up to get your es­ti­mated monthly home pay­ment.

Then you’ll be di­rected to cal­cu­late the per­cent­age of your monthly in­come that will go to­ward your hous­ing pay­ment. “The gen­eral rule of thumb is that your to­tal monthly home pay­ment should be at or be­low 28 per­cent of your to­tal monthly in­come be­fore taxes,” ac­cord­ing to the guide. This is your debt-toin­come ra­tio. But again, this is based on your gross in­come. You know you don’t bring all that money home.

Take the num­bers a step fur­ther and fig­ure out how much of your in­come is left af­ter you pay for your hous­ing and your other monthly debts. Inmy ex­pe­ri­ence, if you’re spend­ing more than about 36 per­cent of your net in­come on hous­ing (prin­ci­pal, taxes, in­sur­ance, as­so­ci­a­tion fees), you’ll prob­a­bly have trou­ble sav­ing and man­ag­ing other ex­penses.

Pay at­ten­tion to the speech bub­bles, which pro­vide con­ver­sa­tion starters for talk­ing to oth­ers and gath­er­ing more facts. Please don’t sim­ply rely on the pro­fes­sion­als who have a vested in­ter­est in your de­ci­sions. When you see a mag­ni­fy­ing glass, you’ll get tips or links to do fur­ther re­search.

Dur­ing one sales pre­sen­ta­tion when my hus­band and I were house-hunt­ing, the real es­tate bro­ker kept say­ing, “Oh, you can af­ford this.” As he was pitch­ing cer­tain up­grades for the new home, he en­cour­aged us to add an ex­pen­sive Jacuzzi bath­tub with wa­ter jets.

Im­i­tat­ing the cir­cling mo­tion of such a tub, I said to him, “I can just swish the wa­ter around withmy hands and save some money.”

The re­cent mort­gage melt­down should have taught bor­row­ers an im­por­tant les­son: Don’t let any­one tell you what you can af­ford. Fig­ure it out for your­self.

I’ll be host­ing a live online chat about “Your home loan tool­kit” at noon Eastern time on Oct. 29 at wash­ing­ton­post.com/

dis­cus­sions. A rep­re­sen­ta­tive from the CFPB will join me for the chat to take your ques­tions about the guide.

YOUR HOME LOAN TOOL KIT A Step-By-Step Guide Con­sumer Fi­nan­cial Pro­tec­tion Bureau

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