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real estate
Homes still too high for 'average' family

The CHP study based affordability on the metrics that a family or person should not spend more than 30 percent of their household income on rent and utilities while homeowners should not spend more than 28 percent of their income on the mortgage, taxes and insurance. The most recent NAR report projected a January 2008 median home price of $198,700 and median family income of $59,858. With a 20 percent down payment, a 30-year mortgage at 6.2 percent would mean $973.59 monthly for principal and interest. Assuming $3,600 per year for insurance and property taxes brings the total monthly payment to $1,273.59 -- barely within the $1,396 maximum threshold, without factoring in any closing costs.

Lenders have often used formulas such as this to gauge a person's lending capacity, but property taxes and insurance can vary drastically by region. Cohen says these affordability metrics can also show different stories based on the number of dependents in the house.

“Just because a bank says you can afford a home doesn't always mean you can.”

"A benchmark is just that and should be taken with a grain of salt. If a single person spends 27 percent of their income on housing, they might be doing great, but if you're a family with five kids, certainly the amount you're able to comfortably spend without cutting into your budget will vary," says Cohen.

Consequences of unaffordable housing
Recent mortgage innovations and Americans' appetite for debt has created an illusion that homes are affordable and within reach of any income. But just because someone purchases a house doesn't mean they can afford it, and those that maximize their lending capacity will often have to make other budget cuts that can affect their financial futures.

Mo Barakat, a senior financial adviser at Ameriprise Financial in Los Angeles, uses more conservative formulas. He says a person should spend no more than 20 percent of income on mortgage payments, 5 percent on property taxes and insurance and 5 percent on all other debt including car loans, credit cards and student loans. That means a person or family with a $100,000 income should spend no more than $2,083 per month on principal, interest, property taxes and insurance. If saving for college or funding a nice retirement is in the plan, housing payments should be even less.

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"The lender does not know the totality of their financial situation in terms of their monthly budget and financial habits. It is the borrower's personal responsibility in terms of borrowing money and meeting their other financial goals," says Barakat.

In other words, just because a bank says you can afford a home doesn't always mean you can. A lender is concerned about an applicant's ability to repay the debt but it has no interest in if there's enough money left over to send children to college or invest for retirement. Many homeowners fail to see this and buy homes at the expense of sacrificing other liquid assets and investments. Furthermore, Barakat says, lenders will often allow people to exceed the 30 percent threshold, but once they do, it almost always has other financial impacts.

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