U.S. mortgage debt has surpassed the 2007 peak. Much of the rise comes from tech-boom cities. Before taking a mortgage, Hometown Lenders recommends its customers evaluate the local market carefully. It's also crucial to understand mortgage basics and calculate affordability.
The average mortgage balance in the U.S. has surpassed 2007 levels by 9.49 percent. Many economists are worried, while others believe the U.S. economy will continue to support even higher housing prices.
Before taking out a purchase loan or refinancing, Hometown Lenders, an Alabama-based mortgage lender with the ability to originate loans in 37 states, recommends its customers become educated on how to use mortgages to their advantage and avoid pitfalls.
In this post, we'll explain the state of mortgage debt in the U.S., how to determine affordability, the pros and cons of second mortgages, and the mortgage approval process.
WHERE DO WE STAND
The 15 states with the highest average mortgage balances are responsible for most of the growth in mortgage debt. Washington, D.C. beats out every state with an average balance of $401,035. That surpasses hyper-expensive California's $347,652. Much of the debt growth is concentrated in states with tech-boom cities.
Real estate prices in Washington State have surged to levels that rival the largest bubbles of the previous decade's housing boom. Young workers have flooded Seattle hoping to score high-tech jobs.
The same technology boom has led to housing shortages in Denver and Portland. Propelled by giant price increases in the tech-boom cities, Washington, Oregon and Colorado have surpassed or caught up to New York State in average mortgage balances.
Real estate markets are local. Some regions have more power to support prices than others. The state of the local economy should always be factored into any mortgage decision. Though real estate prices in one part of a state may be inflated, other parts of the state may still offer down-to-earth prices.
KNOW BEFORE YOU SHOP!
It's easy to fall in love with a home you can't afford. This leads to the temptation of squeezing yourself into an unrealistic budget. The loose lending standards of the 2000s allowed borrowers to mortgage beyond their means by the millions.
People got caught up in a frenzy and forgot to apply two critical ratios that determine home affordability. Had they used the front-end- and back-end affordability ratios, they may have saved themselves from becoming house burdened and facing adverse credit impacts.
Determine this by dividing a theoretical mortgage payment into your gross income. For example, if your target mortgage payment is $1,000 and your monthly gross income is $4,000, then you have a front-end ratio of 20 percent.
20 percent is a healthy front-end ratio. Conventional loans require front-end ratios of under 28 percent. FHA loans cap front-end ratios at 31 percent.
Back-end ratios determine if you can afford the mortgage and your other financial obligations. In terms of affordability, this ratio is the most important. Lenders calculate your back-end ratio by adding the proposed mortgage payment to all of the obligations on your credit reports, such as vehicle loans, credit card payments and student loans.
They then divide this total by your gross monthly income. For example, if your gross income is $4,000, and the total of the proposed mortgage and other payments is $2,000, your back-end ratio is 50 percent.
A 50 percent back-end ratio is unhealthy, and most lenders would reject an application on that basis. Conventional loans require back-end ratios of under 36 percent while FHA loans cap back-end ratios at 43 percent.
THE APPROVAL PROCESS
Lenders consider your FICO score, debt-to-income ratio and income stability. They also evaluate life events, such as previous bankruptcies or foreclosures. Conventional loans require hefty down payments and have strict requirements.
At Hometown Lenders, we make the mortgage approval process as stress-free as we can. We're happy to meet with your family and help you determine the best options. Our experts have access to many loan programs and will do their best to put you in the product that fits your needs.
They also understand the approval requirements, so don't worry. Your home-loan specialist will gather all the needed documentation and manage the underwriting process on your behalf. This leaves you free to focus on important matters like what color you'll paint the new house.