George Kamel - Why You Can Afford Rent But Not a Mortgage

Episode Date: November 27, 2023

Here’s a valid question I get from renters and homebuyers: Why can't I get approved for a $2,000 monthly mortgage payment when I pay $2,000 in monthly rent? In this episode, find out exactly why this mortgage math doesn’t add up. Links:  This episode is brought to you by BetterHelp. Give online therapy a try at https://www.betterhelp.com/george and get on your way to being your best self. Preorder George Kamel’s new book, Breaking Free From Broke, and get more than $100 in FREE bonus items. Debt-to-Income Calculator   Why HELOCs can leave you homeless Find a mortgage provider you can trust EveryDollar budget deal: I love a good deal, and when you sign up using this link, I’ll hook you up with a 14-day free trial and $15 off your first year of the premium version of EveryDollar. Learn more about your ad choices. Visit megaphone.fm/adchoices

Right now, there's a lot of young Americans who are upset and confused. About what you ask? Well, all sorts of things. There's the Netflix password sharing crackdown, the sudden rapture of skinny jeans. How long is too long to hold down your card on the tap screen at Trader Joe's? And of course, what we're talking about today. Why they can pay $2,000 a month in rent, but for some reason can't get approved for a $2,000 mortgage payment.

Talk about being in a pickle. Mmm. Love the smell of brine cucumber at 5.30 in the morning. Listen, I get it. Over the last two years, rent has been going to infinity and beyond the rate of inflation, rising almost 10% since 2021. Always the overachiever of that inflation. She needs to sort out her priorities.

Plus, if you look at rent prices over the last three years, it's been closer to 20%, with an extra $368 on average added to your monthly rent bills. And that's why today we're digging into the nitty-gritty of why this mortgage math doesn't add up for renters, as well as what it really takes to get approved for a home loan. But first, let's talk about one thing I'm. I'm personally upset and confused about. Why you haven't liked and subscribed yet? You watch, I give you free content,

day after day, week after week, and you can't just bother to hit one button. Now, to be fair, over 100,000 of you have already done so, and I thank you for that. I'm very grateful, but we've got a lot more people to help. So let's get to 150,000. And we're going to get there faster if you would just share this channel into your family group chat.

Someone's got to compete with all those Facebook screenshots grandma keep sending. No more. Screenshots. Okay, so let's start with getting approved for rent. Now, typically, you get approved for a rental based on your monthly income. And generally, they're looking for two and a half times the cost of rent. So if you make $5,000 a month, you would get approved for $2,000 in rent. Now, another factor that goes into getting approved for rent is your likelihood to be a nuisance to your downstairs neighbor. Heavy walker, loud talker, shower singer, you got a yippe English Springer, even better, exactly the renter they're looking for. Kidding, mostly. Landlords don't care if you're noisy unless you get reported, and then they might. a little bit. But they do care about your credit history, and more specifically if that credit history is bad. Now, if you don't have a credit score like me because you don't play the games of debt, no worries. I've rented at plenty of apartments with no score. It's totally possible. But other than income and credit history, that's basically it. Easy peasy. Getting approved for a

mortgage, however, is another story. You're going to have to do better than that, Stephen. I mean, if getting approved for rent is like getting a stranger to say yes to a date, getting approved for a mortgage is like getting a stranger to agree to marry you, Meaning that before things get serious, you're going to have a lot more questions about your finances, your employment history, and obviously your feelings about buying in bulk. Which is somehow more questions than they ask on the show Love is Blind. Because our relationship has nothing to do with you. Thank God.

So to get Crystal Pepsi clear on what mortgage lenders are looking for, I asked my friend Seth, who's a home loan specialist at Churchill Mortgage to give me the scoop. So let's talk mortgages here. I want to know about the mortgage approval process. What does it really take for someone who's been? been renting for a while to actually get approved for a mortgage in the current, you know, economic climate. I always tell people there's three main things that we're looking at.

You know, cash, what you have on hand that you can use to purchase a home. Your credit profile, whether you have a credit score or not, it is a factor in the mortgage approval process, your ability to, you know, take on either bills or debt and pay that back. We're also looking at what you make versus what you owe. So obviously, if you don't owe anything, that really helps, you know, with debt to income. but that ratio is another big factor in the mortgage approval process. The biggest thing, at least from Churchill's perspective, is we want to try to keep your debt-to-income ratio at a point where you can comfortably afford the house.

Can you walk us through why someone would be able to rent for $2,000 but not get approved for a $2,000 mortgage? Yeah, the approval process, you know, in terms of rent, is up to the landlord, what their expectations are of the tenants that they allow into their complex. But the mortgage industry is heavily regulated in a way that, you know, getting an apartment is not. And a big part of the reason for that is because, you know, from a mortgage perspective, if you're buying a $400,000 property and you're putting 10% down, the mortgage lender is giving you $360,000 to buy that home. The mortgage company has a vested interest in your ability to repay that debt in a way that the landlord does not typically in an

apartment. So if you don't pay your rent, obviously the landlord might be out a couple months of rent in that, you know, in that apartment. But in the mortgage business, you know, if that person doesn't pay their debt, we have to go through the foreclosure process and then sell that property. So the big reason why, you know, someone would be able to get approved for an apartment and not a mortgage is the process is a lot more stringent. And there's reasons for that because the lender is putting a lot more on the line for that initial investment for the client. Thank you so much, Seth. Always great catching up with you. Thanks for being on. Good to see you, George. Take care. All right, we're back. So basically, most lenders

don't want to give money to someone with a reputation for not repaying debt or someone who currently has a bunch of debt. And that's why the approval process exists, which makes sense. Lending money is risky business. Now, one thing I do want to camp out on for a minute is the whole debt-to-income ratio thing we were talking about, or as they call it in the biz, DTI. For me personally, I use the acronym DTI for, down to ice skate, IYKYYYK-YK, if you karate, you karate. But before we go any further, I want to give a shout out to the sponsor for today's episode. This episode is sponsored by BetterHelp. Hey guys, it's George, you knew that. Sometimes this time of year can get a little rough.

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And that's okay. A lot of people get down this time of year, but adding something positive to your routine can help counteract some of those feelings. Therapy can be a bright spot in all of the stress and change, something to look forward to to make you feel grounded and to give you tools to manage those feelings. So if you're thinking of starting therapy, give BetterHelp a try. BetterHelp is flexible because it's online so it can fit your schedule.

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Okay, back to business. Your debt-to-income ratio is your total monthly debt payments divided by your pre-tax monthly income. Side note, I will link below to an awesome debt-to-income calculator if you want to figure yours out. Now, you may have heard that lenders will often use the 28-36 rule as a sign of a healthy DTI. This means you won't spend more than 28% of your gross monthly income

on mortgage payments, and no more than 36% of your income on total debt payments. That includes a mortgage, student loans, car loans, credit card debt, the whole debt medley, if you will. Stop that, stop that. You're not going into a song while I'm here. Now, if your DTI ratio is higher than that 2836 rule, certain lenders may still approve you for a loan. But they're going to charge you higher interest rates and add extra fees to protect themselves, not you, in case you get in over your head and can't make your mortgage payments.

Thanks, mortgage lenders. Now, some lenders will still approve you even if your ratio is a high as 50%, meaning half of your monthly income belongs to somebody else, and the bank is still willing to give you money. That's wild. And it's why even if your DTI ratio is considered good by industry standards, or if you qualify for another loan, it doesn't mean you should take it. It's like when that guy at the mall kiosk who's selling iPhone cases asks for just a minute of your time, and you just smile politely and say no.

It's a trap! The truth is, lenders aren't helping you out by accepting your loan application when you can't afford it. The interest you pay on the loan is actually helping them out. And that's why I recommend buying a home and getting a mortgage only when you're out of consumer debt and you have an emergency fund of three to six months of expenses. That way, taking on a mortgage won't strap you for cash because 100% of your paycheck goes into your bank account and stays there where it belongs.

But listen, DTI isn't the only factor that makes renting a more viable option for lots of people. There are also the costs that come with homeownership itself. I mean, think of it this way. With renting, that's the most you're going to pay. With a mortgage, that's just a starting point. You can't compare monthly rent to monthly mortgage. It is not apples to apples.

It's apples to passion fruit. Home maintenance, repairs, more expensive homeowners insurance, increasing property taxes, and often pricey HOA fees and PMI fees can make homeownership a huge financial burden if you're not prepared. So let's break these down. Increased utilities. On average, if you're used to paying $100 to $150 on utilities as a renter, you might need to bump up that budget closer to $400 bucks a month if you're a homeowner. Yeah, you can go ahead and kiss that.

Paramount Plus subscription goodbye. Icarly, more like bye Carly. Then there's maintenance and repairs. Believe it or not, most homeowners spend $3,200 bucks a year just on home maintenance projects. Now this could include things like pest control, HVAC tune-tuneups, and landscaping. Those crepe myrtle will rob you blind.

And you can't forget about upgrades and additions. For example, a minor kitchen remodel can cost over $26 grand, aka the cost of your entire psych degree that you're not even using. And if you're thinking, well, isn't that what a he's a hit? He-Lock is for? He-E. Single Hockey Stick O-C-No. He-Locks can literally leave you homeless.

And I've got a whole video breaking down why they suck so bad, and I will link that below for your viewing pleasure. Now, as a rule of thumb, never spend more than 25% of your after-tax monthly income on your mortgage payment. And that payment includes principal, interest, taxes, and insurance. So let's say you make $5,000 a month after taxes, but before other deductions like health care or retirement. Your monthly house payment should be no more than $1,250. That's a quarter of $5,000. You're welcome. Check my math on that. That seems about right. That's what I was going to say. But that's got to include everything I mentioned, principal, interest, taxes, insurance, HOA fees,

PMI fees, if applicable. And what this does is keep you safe from buying too much house and ending up house poor and sad without even Paramount Plus to soothe your sorrow. And listen, I want your home to be a blessing, not a curse. That's the whole point of this. And I know it might seem impossible based on the housing market and interest rates right now. But owning a home is not your only financial goal in life. You also want to have enough margin in your budget to invest for retirement, save for your kids' college, and have a freaking life. Now that we understand why rent and mortgage aren't created equal,

hear me say, I don't want you to rent forever. I want you to be a homeowner when you're ready to. And here's one of the big reasons why. Rent may go up a little bit each year, but when you have a fixed rate mortgage, you know what you're getting. It's like the bathrooms at a Mapco versus the bathrooms at a Buckees. Okay, we all know the Mapco men's room, a little bit of a gamble. But the Buckees bathroom?

I would eat brisket tacos off that floor. I'm not saying you should do it. I'm not advocating for it. I'm just saying, if I was in dire straits, I'd risk it for the brisket. Disgusting! So the goal shouldn't be to rent forever. I want you to have some urgency to become a homeowner because it's a huge step in your journey to building wealth.

Now, if you want to talk to a mortgage professional like I did in this video about your questions or your situation, I will drop a link below where you can get in touch with a mortgage provider that I trust to help you. In the meantime, make sure to share this with your roommate. Or if you don't have a roommate, share it with your noisy upstairs neighbor, along with a cease and desist order regarding those bowling ball sounds.

It's disconcerting. As always, thanks for watching. We'll see you next time.