If there's one lesson homebuyers should have learned from the excesses of the housing boom, it is don't get into too much debt, mortgage brokers and financial planners say.
During the 2000s, lenders made it easy to take out enormous loans to buy a new house or refinance an old one. When the economy hit the skids beginning in 2007 or payments jumped on adjustable mortgages, many people found they had no cushion left to keep up, and they ended up in foreclosure.
In today's market, most lenders won't let homebuyers get in too far over their heads. But there is one prominent exception: The Federal Housing Administration will sometimes back loans for first-time homebuyers that leave them owing half of their monthly income in debt payments.
Mortgage brokers and financial planners alike have advice for such buyers: Don't do it.
"We run our households like Formula One race cars, with no room on the track for any bumps on the road. If there's a stone laying on the ground, they just shatter into little pieces," said Mark Goldman, a mortgage broker and instructor at San Diego State University.
For years, banks allowed people to pay roughly a third of their monthly income for debt payments, sometimes less, said Dave Walling, manager of the Escondido branch of Provident Mortgage Bank. But starting in the 1990s, he noticed a change.
"It crept up incrementally," Walling said.
Simple math exposes the risk of carrying so much debt, Goldman said: If 50% of a household's income goes to paying off credit card, cars, and the mortgage, and the various governments take 30% for taxes, that leaves 20% for food, health care, clothing, retirement, and all the rest of life's necessities.
Despite the arithmetic, some homebuyers are tempted to buy more house than they can afford.
"You go into the candy store, you see the candy, you want it," said Michael Brown, a certified financial planner. "Some people are not willing to buy what they can afford, because that extra $100,000 U.S. looks really cool, but it doesn't look cool when you're going through foreclosure."
Goldman and Brown both emphasized that there are circumstances where a high debt ratio makes sense -- a situation where income is almost certain to rise, is one example -- but usually it's a bad idea. Instead, they think that homebuyers should go back to the traditional norms of owing a third of their income.
"We had that ratio for decades, and it worked," Goldman said.
Also, both men strongly recommended building a monthly budget.
"Always have a cash-flow analysis done before you buy a house," Brown said. "They (homebuyers) go into a house, they don't think about property taxes, or insurance, they forget their going to have to buy a lawn mower, they forget they're going to have those expenses."
But despite the lessons of the boom and crash, a few homebuyers are still taking out too much debt.
Brown and Goldman said only a very small number of their clients ask for that much debt, but Walling said about 10% to 15% of his clients want these high debt-to-income ratio loans.
"I counsel them against it, but they never listen," Walling said. "What are you supposed to do at that point? You've done your job, people have to, at some point, take responsibility."
