Your Mortgage : Judging Your ‘Comfort Level’ With Loan

You’ve just walked out of your mortgage lender’s office all smiles. After all, the lender says that your income--coupled with low mortgage rates--allows you to qualify for a house far grander than you ever dreamed possible.

But in the middle of the night you’re awakened by a strange question: On what basis could the lender say you can ladle out $1,200 a month for housing when he never even inquired about your seven kids, steep private school tuition bills or your annual pledge to the church?

“A lender can only tell you the size of the payments you’re qualified to carry. He can’t tell you what you’re comfortable with,” cautions John Lloyd, a branch manager for Sears Mortgage.

At the minimum, your lender will demand to know your income as well as monthly payments on credit cards, store charges, car loans and other debts, along with mortgages on other property. And he’ll require you to disclose any child support or alimony obligations.

He won’t inquire about above-average outlays for child care, medical care, college tuition or the support of an elderly parent. He won’t have a clue as to whether your lifestyle calls for lavish expenditures for clothes, restaurants or vacation travel. And he couldn’t possibly know you’re on the verge of an income-cutting venture such as a leave of absence for the expected birth of a child or early retirement.

“The system makes no sense,” said David Ginsburg, president of Loantech, a mortgage consulting company. Standard “qualifying ratios”--the basic yardsticks the mortgage industry uses to determine how much you can borrow--are simply mathematical averages that fail to take into account wide differences in household budgets, he stresses.

Suppose, for instance, that a lender is looking at two prospective borrowers with $50,000-a-year incomes and a total of $500-a-month worth of credit card and auto loan debt. Based on standard ratios, Borrower B is “qualified” to make just as high a mortgage payment as Borrower A.

But put the two borrowers in focus for a minute and the picture looks quite different. Borrower A turns out to be Adelaide, a single woman without children, few monetary obligations and lots of savings. Borrower B, on the other hand, is Bradley, a married man with a stay-at-home wife and three hungry college students socking him with hefty tuition bills. Obviously, a house payment comfortable for Adelaide could make Bradley very squirmy.

Why does the mortgage system ask so little about individual obligations? Because the system doesn’t care about you as an individual. What’s likely is that--within weeks of being made--your mortgage will be bundled with other like loans and sold to investors in the form of mortgage-backed securities. And these anonymous investors make their bets based on statistical averages on payment capacity--not on the life stories of the borrowers.

You, on the other hand, have plenty of reasons to care about payment girth.

“If you’re the one buying the house, you’re the one writing the check. What you think you can handle should be the deciding factor,” stresses Lloyd, of Sears Mortgage.

Here are pointers for those wondering whether they should go to the hilt on a house payment:

--Check out your housing finance plans with an accountant or other impartial third party.

All too often, real estate experts say, prospective home buyers forget what motivates a lender. Assuming you are credit worthy, the loan officer is motivated to make you a loan by a potential commission from his firm. And the bigger the loan, the bigger the commission. Obviously, the real estate agent is similarly motivated. Lenders and agents are not in a position to offer an objective answer to the question: “How big a mortgage should I take?”

Lloyd, of Sears, suggests engaging an accountant, who can also help you understand the tax implications of your mortgage choice.

A financial planner may also be a good choice for impartial advice, though some planners--especially those who make their living on the basis of commissions from the sale of investment products rather than fees--tend to favor stocks, bonds and insurance products over real estate, since they have nothing to gain when a client makes a home purchase, real estate experts caution.

--Take into account your extraordinary expenses.

Lenders work off standard “ratios” that determine how much a home buyer can borrow. In lumping borrowers together, Lloyd reminds, extraordinary expenses are not taken into account. An analysis of your finances--whether done on your kitchen table or at an accountant’s office--should include out-of-the-ordinary costs particular to your household. These could range from exotic prescription costs to day-care bills to private school tuition.

“You may be spending $500 a month to send your daughter to St. John the Whatever. But the lender will never ask you about that on your loan application,” Lloyd says.

--Be cautious about making a big leap in your housing payment.

“Do you go out to dinner and the movies more than the national norm? Do you enjoy the flexibility of jumping on the airplane and taking a quick vacation? Have you been buying a new car every other year? Then maybe you should have a philosophical discussion about the needs of the family vs. the wants of the family,” suggests Ginsburg, the Loantech president.

“Just because you can qualify for X dollars doesn’t mean you’re going to be emotionally comfortable with that,” he says.