People Will Borrow Whatever the Bank Will Lend Them

Here's a comment left on my post titled Free Money Finance Top 10 Most Hated Posts/Themes: #5 My Formula for Buying a House that I believe accurately reflects the state of home borrowing these days:

Honestly, people will buy for whatever the bank will lend them. When we were mortgage shopping two years ago, we ran some numbers and figured out what we could afford, but lenders were beating down our door trying to give us 150% of the maximum that we could afford. Ultimately we opted not to buy, which is good, because real estate values in this area are beginning to plummet. But seriously, until this practice is stopped, people won't quit buying beyond their means.

Yes, most people borrow as much as the bank will let them borrow. This is unfortunate since you should never let a bank tell you how much to borrow for a home. Why? Because their job is to make as much money off of you as possible -- not to watch out for your financial future/best interests.

For those of you interested in my thoughts on buying a house, check out my formula for buying a house.

Comments

[moneymonk]

Well said FMF, I really don't know why this practice is not illegal. I always see foreclosures and for each of this foreclosures, there was a bank that approve them.

They really should be a law against this practice.

[Todd Derscheid]

A few years ago, when my wife and I were mortgage shopping, we were pre-approved when shopping for our first house. Both of us have stellar credit, but because I was working for a temporary agency, only my wife's income of about $32,000 (gross, not net!) qualified her/us for...

$130,000! I leave it to the reader to calculate how much we'd have left over for other expenses after paying such a sum.

We eventually bought a townhouse for $59,500 for a 15 year mortgage. Today, we owe just under 40 grand. Not the worst thing in the world.

[Kurt]

Two years ago? I think if you had bought, you'd be ahead at this point, after all relevant fees, interest, taxes, etc (offset against the rent you have since paid as well). Just because values are going down now doesn't mean it was a smart idea to not buy two years ago.

[Lord]

I don't know how much blame the bank is. Buyers often go out of their way for these "deals".

[ciji]

I think it all depends upon what type of buyer you are. Are you looking to just buy your own home, or are you looking to pay off debts or invest. I'm single, no kids, have a thriving home business and great income. yet, I can't afford to buy in Los Angeles. So I'm looking for a cheap house (read: under $200K) in another state. This will dramatically reduce my expenses (my mortgage will be HALF my current rent). For me, it make sense to borrow upwards of 100% because I can use that extra money to invest more aggressively elsewhere, perhaps buy a few duplexes or invest in some mutual funds. Sometimes it's a good idea to use other people's money to help make you more money.