Just because it's easy, don't buy more house than you can afford
Fourth in a five-part series: Tinsel or tarnish?
By Michael D. Larson • Bankrate.com

It's easier than ever to get a mortgage. Lenders now help borrowers get into homes with no money down, bad credit, no proof of income and even bankruptcies in their pasts.

But all of this tinsel can hide a harsh reality beneath. While the explosion of subprime lending, the loosening of credit standards and the relaxation of underwriting guidelines makes it simpler to buy a house, it also makes it easier for people to be seduced into borrowing more than they should. Consumers who aren't careful can find their financial standing tarnished.

"Anybody can get a mortgage if they're willing to pay an interest rate, really anybody at all," says Diana Kahn, a certified financial planner who is president of The Financial Pharmacist Inc. in Miami. "Many people are very excited about being able to get a much more expensive house.

"But the bank doesn't sit down with all of your bills and figure out what you can really afford," she adds. "I think it's excellent that they've opened up homeownership to more people. However, it still requires discipline when you pay your mortgage."

Why has there been such a surge in buying during the 1990s? Credit the strong economy, the desire among lenders to keep profits rolling in, and the political jawboning and budget initiatives of the Clinton administration.

Why it's so easy to get a mortgage now
The rising stock market and falling unemployment levels help ensure people have the money to buy homes. The never-ending quest for a buck leads mortgage companies to dig deeper into the borrower pool by loosening underwriting standards. The president's push for a higher homeownership rate encourages the Department of Housing and Urban Development, Fannie Mae and Freddie Mac to make home loans more widely available. These forces all helped send the U.S. homeownership rate to a record 67 percent in the third quarter of this year.

"It's a good thing," says Rick Harper, director of housing education for the Consumer Credit Counseling Service of San Francisco. "Anytime anybody becomes a homeowner, everybody wins as long as they don't get into something they can't handle."

Many programs spurred on by this climate make buyers' lives easier, but super-low and no-down payment mortgages are among the most popular. They allow people to pay as little as 0 percent down to get into homes at the same mortgage interest rates that regular borrowers pay. They are different from no-points, no-cost loans, which allow customers to avoid paying anything at closing by agreeing to pay a higher rate and having the lender pay the fees out of its pocket.

"For first-time home buyers that can make a very small down payment, this can be a godsend," says Nancy Langdon Jones, a CFP in Upland, Calif.

Relaxed standards helped, too
Credit, overall debt and income-verification standards have relaxed considerably, too. Consumers with past bankruptcies on their credit records or those who don't want to prove how much they make or have saved up aren't penalized as heavily as they once were. That has made it easier for self-made businessmen and others without a years-long history of employment at the same company to get loans.

Finally, the world of private mortgage insurance has gotten a little simpler to navigate. PMI, as it's colloquially known, allows borrowers to buy without 20 percent down by insuring lenders against the possibility such customers will default. Consumers pay the bill in monthly premium installments or all at once by financing the amount into their loans. If someone defaults, the PMI company steps in and compensates the lender.

While borrowers generally could get rid of the coverage once they paid their mortgages down to 20 percent equity, that wasn't always the case since cancellation policies varied from lender to lender. That changed, in theory, with the recent passage of federal legislation aimed at simplifying the process. Borrowers can now eliminate the extra monthly burden relatively quickly. The healthy price appreciation many owners are experiencing today helps speed the process, too.

So what's to worry about at the end of the millennium? Plenty, according to some financial experts.

It's easy to get in over your head
Because many home loan hurdles have been removed, inexperienced buyers can easily get in over their heads by borrowing too much or borrowing without a cushion against financial hardship. Even a slight economic downturn could push many too far, especially those who have no equity in their homes. Such consumers would likely end up owing more on their mortgages than their houses would be worth. That's because property values would fall faster than their mortgage balances because payments go mostly toward interest rather than principal in the first few years of the loan term.

"The old thing, 'If it sounds too good to be true, it probably is' is something you can apply to this," says Jones. "It sounds great to make no down payment and have lower costs but usually there is some kind of a catch."

Consumers will find that stretching beyond their means is a lot easier with the looser underwriting standards that prevail today as well.

The old debt ratios used by lenders typically prevented people from getting mortgages if their monthly loan payments would eat up more than 28 percent of their gross monthly income. Overall obligations, including credit cards, auto loans and the like, couldn't account for more than 36 percent. But today people with good credit can qualify with 45 percent or more of their income going to debt service, allowing them to buy homes that could easily end up proving too expensive.

Most importantly, planners recommend that potential buyers think carefully about the kind of commitment they're making when they purchase a home. While it might be easy, it can prove a heavy burden for the unprepared.

"The mortgage companies aren't going to make it easy for you to walk away from a loan," Jones says. "But get a house that you can afford rather than getting suckered into something where you're having to work like a dog forever just to make the house payment and not have any other fun in life."