How Much Mortgage Can You Afford? Tips to Prevent Over Borrowing
Unless you are independently wealthy and can afford to pay cash for a new home, you'll need to take out a mortgage like the rest of us. That's normal - very few people can afford not to work with a lender. However, there are some pitfalls you need to avoid in the home loan process, including over borrowing. How much mortgage can you afford?
Preapproval Is Your Max
If you follow conventional advice (and you should), you'll seek out preapproval from a lender to see what you qualify for in terms of a mortgage. It's important to realize that the amount the lender preapproves is at the top end of your spending ability and is based on your debt to income ratio (DTI). So, that means you most likely cannot afford a loan for the total amount of preapproval. Set your sights a bit lower.
Know Your Hard Costs
When determining how much mortgage you can afford, it's important that you are realistic about the hard costs that apply to your situation. You likely know about closing costs, but there are many other fees that must be paid during the home loan process. These include title charges, government recording fees, transfer fees, settlement charges, origination fees, processing fees, appraisal fees. Know what fees you'll need to pay, and work those into your calculations to make sure that you do not over borrow. Some of these may be negotiable (the seller may be willing to pay the closing costs), but many of them are not, and will need to be paid before you can even obtain the mortgage loan.
Buy for Less
Too many homeowners learn that they are approved for a loan up to a certain amount, and automatically start shopping for homes in that price range. That's the wrong tack to take. Instead, it's important that you shop for homes priced under that mark, as it represents the absolute maximum that you can afford. For instance, if you are approved for a loan of $200,000, don't automatically look for homes priced at $200,000. You need to leave some wiggle room to account for other costs that you'll incur, and to ensure that you can actually make the payments.
Budget Correctly and Be Conservative
Perhaps the single most important consideration when determining how much mortgage you can afford is to create an accurate budget that accounts for all of your income, and all of your expenses. Do not play "fast and loose" with your figures, either. If anything, your calculations should fall on the conservative side of things. It's always better to have a little financial cushion than it is to discover that you are barely scraping by.
There is plenty that you need to consider when determining how much house you can ultimately afford, but the most important thing is to keep your enthusiasm from running away with your good sense. Yes, it's an exciting time, but it's vital that you are financially cautious or you could find that you've borrowed more than you can repay.