Why the mortgage amount your lender approves isn’t necessarily the amount you should borrow


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It is important to run your own numbers.

Key points

  • Mortgage lenders use different factors to calculate loan eligibility.
  • There are some expenses that your lender may be aware of now that could affect what you can afford.
  • Think of bills like child care costs, which aren’t the part of your finances that a mortgage lender will assess.

One of the biggest mistakes homebuyers make when buying a home is taking on an overly expensive mortgage. In fact, years ago, one of the main reasons the housing market suffered a severe meltdown was because too many homeowners had put themselves in over their heads financially by taking out mortgages they couldn’t afford. couldn’t afford.

Since then, the mortgage industry has become stricter when it comes to granting loans. And these days lenders have pretty strict requirements.

But you could still find yourself in a situation where a mortgage lender allows you to borrow money that you can’t really afford. So rather than relying on a mortgage lender’s determination as to what you should borrow, you’re much better off crunching your own numbers and seeing what loan amount makes sense.

A limited pool of financial data

Your mortgage lender will have access to certain financial data when approving your mortgage application. Your lender will need to know how much money you are making and what your existing debts look like. These factors, along with your credit score, will help your lender decide if you’re approved for a mortgage and what the loan amount looks like.

But your income and existing debts don’t tell your whole financial story. It is therefore important to take into account your own situation as a whole when deciding on the amount of a mortgage to take out.

Let’s say you currently spend $4,000 a month on child care. Since this is not a debt, your lender may not know or ask about it. So your lender could calculate your mortgage amount assuming you are not on the hook for $48,000 a year in childcare costs.

More: Our picks for the best FHA mortgage lenders

Or, to put it another way, your lender might determine that you can vary the monthly payments on a $400,000 mortgage depending on your existing debts and income. But if, based on your total expenses, you think you can only cover the payments on a loan of $300,000, then that’s the mortgage amount you should limit yourself to.

Don’t get in over your head

As a general rule, your monthly housing costs, including your mortgage payment, property taxes and home insurance, should not exceed 30% of your take home pay. But this rule can be adjusted depending on your situation.

If you have another really big expense, like childcare, you may decide that you’re only comfortable spending 20% ​​of your income on housing, or 15%. And it’s your choice to make.

Ultimately, you know your own financial situation better than your mortgage lender. So while you may be tempted to borrow as much as your lender will let you, it’s best to do your own math and come up with a number that makes the most sense financially.

Taking on too much of a mortgage could lead to a world of stress, not to mention the risk of falling behind on that loan or other bills. So you better play it safe and borrow less.


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