When buying a home, one of the first questions people tend to ask is "What do I qualify for?".
While this seems like an appropriate question, in reality it doesn't matter what you qualify for - it matters what you can afford.
Affordability should be the most important aspect of a home purchase - while a lender might be able to approve your loan, you might not be able to afford your loan! While stricter guidelines have recently helped limit what buyers can qualify for, in many cases someone can still get a loan that is far above their means. How can this happen? Well, there are some things that lenders DON'T look at that you should be considering when buying a home and determining your price range.
Your income- We look at your gross income, not what you take home - we use a dollar amount before taxes, before social security, before medicare, before state tax, and before your benefits/401k contribution. For this reason, our 'qualifying income' may be substantially higher than the money that ends up in your bank account.
Your debts- Sure, we look at what's on your credit report and account for credit cards, car loans, judgments, and those sorts of things, but we DON'T look at your cell phone bill (or your spouses bill, or your kids' bills), what your utility bills will be (so when you decide to get light speed internet along with 63,000 TV channels, we don't take the $200/month bill into account on your qualification), or any other monthly debts that you're going to pay like groceries, gas, auto & other insurances, etc.
What's going to break- Many loan programs have no reserve requirements, meaning as long as you can cover the down payment and closing costs, we don't require any extra money in the bank to offer you a loan. This can be dangerous if you're shopping in the "What do I qualify for?" mindset rather than the "What can I afford?" mindset because if you have no money in the bank and have very little disposable income, things can and will go wrong - hot water heaters will break, children will flush plastic dinosaurs down the toilet and color on the walls, and you will have to come up with money to fix or replace these things.
Your spouses debts- In states that don't have community property laws, if your spouse isn't on the mortgage application, we don't look at their debts/income when qualifying your home purchase. If they're self-employed and you have to support their debts on occasion or if they have a huge tax bill at the end of the year, that is not factored into your mortgage application, but it SHOULD be factored into what you can afford.
For many people, buying a home is the single biggest purchase of their life and is still a huge part of the American dream. Buying a new home should be a happy time and home ownership should be a joy. For many people since the market turn of 2008, however, home ownership turned into a major financial burden because people were more concerned with what they could qualify for rather than what they could truly afford. You don't want home ownership to leave you one accident or broken water heater away from foreclosure, so be smart when you buy - focus on a payment you can afford and not what you can qualify for!
"It is thrifty to prepare today for the wants of tomorrow." - Aesop
The good news is there are many affordable homes on the market, and after you work with your lender to determine that you can get a loan, a real estate agent can help you find a home that you can both love AND afford! Talk with your loan officer about affordability and what loan program is right for you!
If you need help determining what you can afford, check out our Purchase Assistant and we'll be able to help you get the most house while keeping your payments affordable.
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