I do not understand the consensus of the financial banking industry today. A acquaintance of mine just had a third child. He lived in a 1,400 square foot house, which I even understand is small for a family of 5. He starts looking for homes and finds a 3,100 square foot home for $235,000. He was showing me pics and it is really nice, but I am also thinking how financially strapped he always is. He makes less than $60,000 a year and his wife works part time as a secretary. The bank told him that a conservative home for them would be $254,000 and aggressive would be $318,000. He was in a $134,000 home before this one. So his monthly payments have gone up dramatically and his unforeseen drastic utility bill increase, which no one pointed out to him would be a lot more, has really put the pressure on him, financially. I thought after the 2008 recession that this type of lending had been eradicated. One economist I know was discussing the issue with me and he put it that the banking industry needs to be forced into completely hand-holding the customers in the process, including a complete budget in the process. I brought it up to him about this guy, using him as an example. I stated that with this house the guy bought, he will never be able to 1) Save for college for his kids, 2) Save for retirement, and 3) Amass any form of real savings. He totally agreed that the lending process have improved just slightly since the recession.
It sounds like the financial pressure is unavoidable. His priority was having 3 kids, not saving money.
Yup, some people don't think things through. BTW - The mortgage brokers (NOT bank) told me that I could afford higher payments than I thought... Luckily I didn't listen to them - after all, it is my budget.
Yeah, that sounds about right. Without knowing how much he has to put down it's hard to say exactly, but the usual rule of thumb for a 30-year mortgage is that you can afford to borrow about 3-4 times your annual household income (before taxes). You haven't said what his wife makes, but if they're bringing in $70k per year than a house in the range you cite there is pretty reasonable (assuming a 20% down payment, which presumably the bank won't loan them the money unless they have that). Sounds like the problem is that your friend is an idiot who fails to think things through and plan accordingly. There is nothing unexpected about an increased utility bill when you move into a bigger house. That's just common sense, and investigating whether there are any issues with the house that would make that bigger than normal (poor insulation, outdating heating/cooling systems, etc.) is standard due diligence for home buyers. Unless you can point to some fraud or misrepresentation, I don't see where he has anyone but himself to blame for his situation. Nah, the type of lending you describe there is the regular, conservative type stuff that isn't risky. The loans being made in the bubble were absolutely ridiculous: people with no money down being loaned 10 times their income (without even bothering to verify said income) to buy properties that were already obviously overpriced anyway. What you are describing here is a perfectly sensible, conservative loan (given the income you specify), that was apparently made to somebody who apparently has a real hard time with the basic of finances, budgeting and planning. Every loan officer I've ever interacted with has very clearly broken down what the monthly payments (including insurance and property taxes) would look like. Again, sounds like your friend is just crap at budgeting and planning. Sounds like he needs to get a better job, and also spend a decade or two allowing inflation to eat away at the value of his mortgage payments. A lot of parents out there don't save much for their kids' college educations, and simply end up paying out-of-pocket when the time comes. You appear to be ignoring the equity in his house, which is normally the main form of savings that homeowners accrue.
Really? Most don't save more than just that? The equity in a home is not a lot to save for retirement if that is all they are saving. I guess I am just out of touch with most people then because to me it sounds like with almost half of his monthly income going to a mortgage, it really would suck!
