Aside from the great weather and beautiful views, one thing residents of California can expect is higher median home values. Although our median incomes are adjusted to meet these higher prices, the penalty for error when managing your debt to income ratios increases as well.  As lenders realize the importance of filtering out those who cannot truly afford their homes, debt to income ratios are once again strong indications of ones financial ability.  During the housing boom days, debt to income ratio standards weakened as stated loans emerged as the popular method of “verifying” ones income.

Well, earlier this month, the Mercury News put into perspective how poorly homeowners in California are keeping these debt to income ratios in mind. In fact, according to the U.S. Census Bureau of 2007, all nine Bay Area counties ranked in the top 40 spots with the highest percentage of homeowners spending more than 50% of their income on housing. 

More than 50%. The problem is that the more you spend on your housing, the less income you have for other expenses, and the less financial flexibility you have. Keep in mind these figures are only for housing and do not include various expenses such as car payments, insurance, food, cell phone bills, entertainment expenses, and so forth. Add those all together, and if you’re spending more than 50% on housing, you’re either very close to living paycheck to paycheck or well past that point already.

In California, these problematic statistics are shown to increase steadily from 2004 to 2007. Aside from stated loans, people also grew more comfortable with leveraging their money so heftily; expecting home values to continually rise. The problem is that when it comes time to refinance because of your adjustable rate mortgage, and you can’t–you’ve given yourself no wiggle room. If you’ve maxed out your debt to income ratios in the first place, by the time your payments begin to increase you’ll have no more room to breathe.

That being said, here are a few tips I’d like to share regarding your debt to income ratios:

• Don’t just consider your DTI another loan qualification obstacle. Seriously consider this ratio and see if you’re actually qualifying within these limits. With loans more stringent these days, you’ll most likely have to document your income. But, if you are stating your income, make sure your stated numbers are true to what you make. You may feel like you’re scoring a great deal or getting past the system, but these ratios are in place for a reason.
• Plan ahead and consider the future, but don’t bank on anything. Don’t rely on home price trends or future expectations to calculate how much you can afford. There are cases where great predictions can mean great opportunities and sweet profits, but take the current economy as a lesson to see what happens when these future expectations aren’t met.
• Think carefully about any type of adjustable rate mortgage. Again, there are opportunities where adjustable rate mortgages can be great. But, consider the possible scenarios if your payments were to increase. Could you afford it? Would you be even willing to pay that much? Refinancing is usually an option to transition back into a fixed rate mortgage, but again, see what is happening to people today who are stuck in their ARM mortgages.

There’s definitely a lot of things shaking up this housing market, but the bottom line is always your dollar. Home prices and slowing economies are definite causes for concern, but the bottom line is what’s coming in and out of your pockets every month. Take this consideration carefully, and you’ll see why debt to income ratios are still such important mortgage qualification tools.

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