Tulsa World: Keep an eye on ratios to avoid housing mistakes

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Keep an eye on ratios to avoid housing mistakes

By PHIL MULKINS World Action Line Editor
Published: 9/29/2009 2:23 AM
Last Modified: 9/29/2009 9:10 AM

Dear Action Line: We're looking at houses and want to avoid the mistakes of the pre-2008 past. Which is more economically sound — buying or renting a house? — S.A., Tulsa.

Bankrate.com says all our financial tribulations are due to a "speculative frenzy" in which too many people borrowed more than they could afford to repay. This includes every pocket of the society — not just home mortgage buyers — but everyone who ever lived beyond his means, from home mortgages to credit cards.

Best advice: People must never again borrow more than they can afford to repay and must avoid mortgages they don't fully understand. With loans featuring variable monthly payments, borrowers must know how high they can go and be prepared accordingly.

They must realize the unexpected can and will happen — home prices will go up again but will just as certainly come back down. House values can always fall, putting those who borrow 100 percent of their homes' value in danger of losing them.

Bank wall carvings: The old mortgage lender's stone-chiseled rule was that house payments should never exceed 20 percent of the borrow's take-home pay. But that was before health care took 30 percent of our income.

Today, cautious lenders compare monthly income and expenses to qualifying measures to arrive at the "debt-to-income ratio." They finance buyers whose house payments (loan payment, property taxes and insurance) will not exceed 28 percent of gross monthly income. But they also must consider the "overall debt ratio" — total monthly expenses including housing, credit card minimum payments, loan payments and every other monthly debt including hospital and doctor bills. They want this ratio to fall below 36 per cent of gross income. If your ratio is above this, you won't get a mortgage loan and should reduce that number before even applying.

Down payments: Today's foreclosures could have been avoided by would-be homeowners making substantial down payments, which lowers their monthly payments to start with.

Equity in homes cushions the impact of falling prices, allowing owners to sell when they suddenly can't afford their mortgages anymore. If they owe more than their houses are worth, they can't sell without their lender's permission.

Rent or buy: Whenever monthly mortgage payments greatly exceed monthly rental amounts for comparable houses, it's a sign that house prices are unsustainably high.

When it's a lot cheaper to rent the same house, it makes sense to rent instead of buy.

A sane housing market has homes with annual rents of one-fourteenth the home's market value. Figure the home's reasonable monthly rent payment by dividing that figure by 12 (months). Example: a house worth $140,000 (divided by 14 has an annual rent of $10,000) divided by 12 has a monthly rent fee of $833 a month. This ratio might vary, depending on taxes and utilities, but it's a good, quick way to decide whether to rent or buy. See tulsaworld.com/House2Income .

Frenzy not: In the housing fever's most infectious months, home prices skyrocketed 30 percent annually.

Homebuyers were gripped by "the housing frenzy," a variant of "gold fever." Buyers feared being priced out of home ownership by waiting and leaped to their financial deaths in the Red Ink Sea.

Submit Action Line questions by calling 699-8888 or by e-mailing phil.mulkins@TulsaWorld.com or by mailing it to Tulsa World Action Line, PO Box 1770, Tulsa OK 74102-1770.

By PHIL MULKINS World Action Line Editor

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