financialcounselor

Know what you CAN’T afford

In Lesson of the Day on September 8, 2010 at 9:23 pm

Banks still giving out mortgages that will never be paid back 

  Scott from Georgia called in because he was having to borrow money from his parents every month to make his house payment. Scott was 26 years old, and he brought home $1,800 per month in income. He had just bought this home a year earlier, and his monthly mortgage payments were $900. Half his income went right to the mortgage! Anybody is going to struggle when half their income goes right to a house payment. Plus you’ve got to pay utilitites, plus whatever it costs when something breaks.
 “I don’t know Scott, without a roommate or a big raise, it just doesn’t seem like you can afford this mortgage,” I said. “The house payment is half of your income. Did they know how much you made when you got the loan?”
 “Sure, I had to submit my pay stubs and tax returns,” he said. “I was pretty shocked when they said I qualified.”
“If it were thirty years ago, you probably wouldn’t have,” I said.
  As soon as he bought the house he began to have money problems. That’s because Scott’s salary simply didn’t afford him $900 a month for housing. He needed a house or rent payment that was closer to $600. And now his parents were getting tired of giving him hundreds of dollars every month to pay his bills.
 “Unless you can get more money coming in, you should probably talk to the bank about letting go of the house,” I said.
  Scott got his loan in the fall of 2008. By that time the default rate on mortgages had been climbing steadily and we were on the brink of economic meltdown. Maybe those bank executives whose bank lended Scott the money simply don’t read newspapers? Doubtful. More likely, the bank that loaned him the money turned around and immediately sold the debt for a profit, which is how the mortgage industry now functions.
  So keep that in mind if you are in the market for a mortgage. Don’t let some loan officer or broker tell you what you can afford. Know yourself what you can afford so that you don’t end up in a situation like Scott’s.

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  1. “I was pretty shocked when they said I qualified.”

    Well Scott, why did you go ahead and get the mortgage then? You clearly realized you couldn’t afford it regardless of whether the bank were willing to lend you the money.

    Certainly banks shouldn’t lend to those who can’t afford to repay, its financially and socially irresponsible and banks should be smart enough to know better. However Scott, and others like him, need to take more responsibility too. Perhaps we need to teach responsible personal finance in schools…

    • David, I agree with you. Teaching better personal finance skills (and some personal responsibility to go with it) would be a great step. Unfortunately until we reign in the men in charge of our great financial institutions nothing much will change. Very responsible people are still capable of being conned; painting rosy pictures in the sky is what these businesses do best. Just like the students who took out thousands in loan debt with the hopeful promise that they’d all get jobs when they graduated – and then graduated to find the economy in smoking ruins – the borrowers who bought houses they couldn’t afford were told in colorful, happy language that they’d surely be able to afford the house in some magical “future” and that its value would only increase; housing is always a good investment! … right?

      The system is more a problem than the people within it.

  2. Its such as you learn my mind! You seem to understand so much about this, such as you wrote the e book in it or something.
    I feel that you just can do with some p.c. to pressure the message
    house a bit, however other than that, that is excellent blog.
    A great read. I’ll definitely be back.

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