Renters becoming homebuyers. Sometimes We Take On More Than We Can Handle

November 5th, 2012

All homeowners have been renters at one point. Right before a renter will make a move up to home ownership and become a first time homeowner, they will talk to a mortgage lender like me to see how much of a mortgage they might be qualified. What do you think the rules are for a renter as far as how much mortgage they can qualify for? They are the same rules as anyone else. The debt ratio limits are the same. The income requirements are the same. The credit score requirements are the same.

The one thing that is different is that an underwriter will look for something called “payment shock” and try and determine if the monthly payment on a new loan amount is too much for a former renter to handle because it is too large of an increase from their former rent payment. If there is payment shock the underwriter will look for compensating factors that suggest that a renter can handle the payment shock, like having extra cash reserves, or an exceptional credit score, or a very stable employment history.

Instead of taking on more than they can handle most renters will say, “I want my mortgage payment to be about the same as my rent payment.” That will almost never happen. You cannot make an arbitrary decision on what your mortgage payment will be based on your comfort level with how much you have paid in rent. You would be comparing two completely different entities. Market rental prices and the square footage you were comfortable living in when in a rental, are almost always completely different than the market purchase prices and square footage (and probably even neighborhood, amenities, views, level of finish, etc) that you will look for when buying. So the price is going to be different.

When I bought my first house, I had been living with a childhood friend for 2 years, right out of college. My friend Doug told me his parents had divorced, had each moved into a new home, and that left him living in the home he had grown up in, alone. His parents had paid off the mortgage and had decided to let their son, my friend Doug, live in it rent free. It was a 4 bedroom house! So Doug asked me to live there as well, and said all I had to do was split the utilities with him. So from 1986 through much of 1988, I had a place to live for $150 a month! But then I wanted my own space, and bought a townhouse, and the payment was going to be $1,118 a month. I panicked! How could I afford this? I had been living in a place for $150 a month! I could afford it, easily. I was qualified, I made enough money, I had good credit, it was all going to be fine. My reaction was based on emotion and what I had been comfortable with, my reaction was not based on any fiscal reality.

The bottom line is to buy what you are qualified for, and not what you formerly rented for. You will never stop renting if this is your prerequisite for home ownership.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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