Home buyers in the 1970s and 1980s often employed a "rule of
thumb" guideline to estimate how much house they could
afford. This formula - based on two and a half times the
amount of the buyers' annual income and a down payment of 10
to 20 percent - no longer applies, especially for first-time
buyers.
Most of today's mortgage
lenders review not only borrowers' income and down payment
but also their current debt level. As a result, two mortgage
borrowers may have the same incomes; but if one also has
monthly auto and student loan bills to pay, for example,
that borrower will qualify for a much lower loan amount.
This new consideration can
make it difficult for first-time buyers to choose the loan
they want.
They may be able to turn to
alternatives, such as adjustable-rate mortgages or Federal
Housing Administration loans; but these products also carry
the risk of rising interest rates and costly mortgage
insurance.
To make the best decision,
borrowers must simply make sure that they are comfortable
with their monthly mortgage payment. They should also note
that they do not actually have to buy a house that costs as
much as the loan for which they qualify.
"'Rules of Thumb' Don't
Fit Everyone's Financial Picture," Miami Herald Online
(04/09/00); Garton-Good, Julie.
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