This is a guest post by Grayson Bell who found himself with over $50,000 of credit card debt not too long after graduating college. After realizing that it would take him 40 years to pay off that debt he buckled down, made a plan and over the next four years he paid down all of his debt. He runs the extremely popular site Debt Roundup and I am very excited for him to share his story with you today. If you would like your personal finance story or article to be feature on Vosa let me know here.
Since I am deep into the process of listing our first home for sale, I thought it would be good to share a little about my housing story. Most people start to listen when I say that we bought our home in 2006. Yes, the height of the mortgage crisis that crippled the US economy. As I look back at the process, I realize why the system broke and so many people lost their homes. We could have been just another statistic as well, if I didn’t understand a little bit about mortgages.
My Mortgage Background
One thing that many people don’t know about me is that I was a mortgage debt collector for 2 years while in college. It was the best job in my college town and it paid well. While collecting debt from anyone is not a fun job, doing so with some of the worst borrowers just made it worse. I worked for a company that serviced mortgages from the biggest offenders of the crisis, especially Countrywide.
I had to go through a three week training program to understand the ins and outs of mortgages. I also learned a lot through just doing my daily job. This background gave me some major insight into how mortgages and lending works.
Looking to Buy a Home
My wife and I graduated from college in 2006 and moved into an apartment. After a few months, we realized that apartment life was not for us. We wanted more flexibility and I needed a place to store all of my toys. If you don’t know me, I had a little fight with debt, which I won. As I graduated college, I had already owed $25,000 to the credit card company. This was due to frivolous spending and funding my online business.
OK, back on topic. We both landed good jobs right out of college, so we were earning income. It was a little shy of $50,000, so not bad off. Since I was oblivious to my debt, I thought we could easily purchase a home. The excitement of a new purchase came over us and we were giddy like little school kids. Nothing good ever comes from being in that state of mind. We quickly found a buyer’s agent after looking at homes on our own and the chaos began. For those that have purchased a home before, you know what I am talking about.
Getting a Mortgage
When you start looking for a home to buy, it is always good practice to get pre-approved for a loan. This will help you understand how much home you can buy. Now, let me tell you one thing about getting pre-approved. What banks didn’t used to tell you is that the pre-approval amount is what you can afford at your top end. This means that you won’t even be able to afford food, pay for utilities, drive a car, or anything else. It is the absolute maximum that you can even afford. It was a terrible model.
For my wife and I, our mortgage lender pre-approved us for $450,000! Yes, you read that correctly. I came in with $25,000 in credit card debt, along with a car loan. I had a negative net worth that was close to my annual salary. My wife had a positive net worth, but a very small one. She had no debt. One thing that I had was a great credit score for someone at 23. We made only $50,000 a year, so this pre-approval amount was completely outlandish.
Since I had a little experience with mortgages and understood a bit about my DTI, I realized that we would be in serious trouble if we bought a home anywhere near this pre-approved amount. In the end, we bought a home that was less than $175,000. Just to show you the difference, I decided to provide you with what we pay now and what we would be paying if we went to the high end.
We currently spend $1,260 for our mortgage at a rate of 5.625% (click here to the best current mortgage rate). Since we got 100% financing, which I do NOT recommend for anyone, we had to pay PMI. Just by they way, we are still paying PMI. The amount I gave you above is our mortgage payment along with our escrow account for taxes and insurance. It also includes PMI. With our annual salary and my debt, our DTI was close to 65%. We should have not even been approved for the mortgage that we got, but that is here nor there.
If we decided to go all HGTV style and buy a home at the top of our pre-approved amount, then we would be paying so much more. With PMI, escrow, and the regular payment, we would have been paying $3,267. Oh man, as I read that number, it just frightens me. I can’t even afford that payment now, let alone 7 years ago.
Though I struggled with debt and shouldn’t have purchased a home when I was underwater, I did do one smart thing with regards to how much we spent. Don’t let the shows on HGTV push you to do something that you will regret. Remember, you don’t get to return your mortgage. If you want out, you either have to sell your home or declare bankruptcy. Both of these options can be difficult, so creating and executing on a plan upfront is what you should focus on. As I stated, when we got our mortgage, our DTI was close to 65%. It has been 7 long years with regards to our finances, but now we have a DTI under 20%.
If we would have went with the large mortgage, I am not sure where I would be right now. I am certain that I would have had to declare bankruptcy. This entire experience showed me how bad our bank lending was and why the meltdown came. Most people could have never afforded the loans they were given, but we can’t just blame the banks. Individuals have to take some fault for not understanding what they were getting into, especially with such a large purchase.
Are you a homeowner? What lessons have you learned from buying a home? Did you buy as much house as you possibly could? Or did you buy a less expensive house to manage your DTI?