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and THAT is the problem.
Everyone should care... especially the debtor.
I think it is obvious the debtor should care however, why should anyone else outside of the debtor care if they over spend and lose their home?
Some people never learn how to handle money no matter how small the cost of the home or the payment, others own nothing but they do rent everything from the banks, the credit card companies, the vehicle finance companies, etc. but they still send those payments every month and tell everyone they own this or that.
We own everything because we pay cash and if we cannot pay cash we do not really need it.
If more would quit relying on credit and loans more would be living within their means and the higher cost of everything would probably come down because not too many can afford to pay cash for an over priced $300,000.00+ home.
We knew we were going conservative on house prices relative to our income, but like OP were amazed what our bank said we probably _could_ qualify for if we wanted it. I don't know what the upper limit would have been for us since we didn't try, but apparently it'd have easily been 3-4x our annual income, and that's with a big law school loan still being paid off. We're in a high property tax, high utility cost area, too. I can't imagine spending that much on a house unless we decided to run our cars into the ground, never travel or go out to eat, and the real biggie -- never do any maintenance on that expensive house we just bought!
in that case there is NO WAY we can afford that kind of payment. I realize I am not obligated to spend what the bank will lend me and I already said above that we are not planning on spending this amount.
And, whatever you do, do NOT tell a RE agent how much you are pre-qualified or pre-approved to spend.
They are sales people and, regardless of the code of ethics, will want to maximize profit on the sale. Intentionally or unintentionally, they may try to push you above any self-imposed spending limit.
When we bought our home in 2007, we were pre-approved for over $650K, more than enough to buy anything in our rural south Texas county. We set our limit at $250K and stuck to it. As was posted in an early post in this thread, real estate taxes in Texas are high (no state sales tax and independent school districts). Our taxes equate to half of our mortgage payment.
Our agent, now a good friend of ours, showed us home up to $350K. But no. We didn't bite.
I'm am SO glad that we didn't go crazy even though we were pre-approved to buy a huge house.
We are looking at houses on large plots of land that do not have HOAs. Although our Chase preapproval letter apparently will not work for larger pieces of land, so that is something to consider. For that we will go with Ag Carolina who does manual underwriting and is MUCH more conservative (thankfully).
I agree with other posters though that the maintenance cost is a big consideration! Financial planners usually recommend 25-33% of your income going to housing expenses INCLUDING maintenance (not utilities though). Why would we put nearly HALF of our take home pay toward housing expenses? Again, makes no sense.
Also, we are looking at county taxes which are less than 1% so the tax rate is not going to be that huge. So that person who is paying $600/mo toward escrow? We are going to be way below that.
Anyway, it is just something I thought I'd bring up because it's crazy, not because I'm planning on maxing out the budget. Our RE is a country boy just like us so he is really careful with our budget and has been great at not suggesting houses outside of our 300k budget. The only houses that are outside the budget I have personally found and asked to go see because I think we will have negotiation power to get them down, not because I want to go so far over budget.
I think it is obvious the debtor should care however, why should anyone else outside of the debtor care if they over spend and lose their home?
Well, everyone else should care because a whole lot of people all losing their homes at once impacts everyone i.e. look at the most recent recession we're still not fully out of. It was primarily driven by the collapse in housing prices leading to massive foreclosure rates, which tanked the economy.
The bank prequalifies you based on the PITI and the liabilities on your credit report. They apply a ratio to your income to calculate your maximum payments. That ratio is usually around 50% of your income (+-7%), more or less, depending on the loan scenario. Can you afford it? That's up to you. But don't forget to take into account the possible tax deductions for interest and property taxes (consult CPA).
A reason for the housing crisis that is closer to your logic is: income wasn't properly verified.
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