Just Because You Can - Doesn't Mean You Should Get a Big Mortgage

By
Real Estate Agent with Keller Williams Capital Properties DC AB15253
https://activerain.com/droplet/5ktS

As you get ready to start looking for a home, the first two thing you should do is to find a great Realtor who will look out for your best interests and second to get pre-qualified for a mortgage. It is important to find out how much you can afford  to spend on a home so that you are confident that you are looking in the right price range and so that you can afford to buy that dream house when you find it. 

When you make that mortgage application, the lender will decide how much money you can borrow. However, that doesn’t mean that you should take out a loan for the full amount. In fact, you may be surprised by how much the lender is willing to give you!  In some cases, borrowing the maximum a lender will allow could leave you overwhelmed by debt.

How Lenders Decide How Much You Can Borrow

Lenders base mortgage decisions on several factors, including credit score and length of credit history, but the most important factor is a borrower’s debt-to-income ratio. This is the sum of all debts, including a mortgage, credit card minimum payments, and vehicle, student, and personal loans.

Most lenders want borrowers to devote no more than 28 percent of their gross income to a mortgage, property taxes, and homeowners and private mortgage insurance. They also generally want your total debt payments to be no more than 36 percent of gross income but they will allow up to 50 percent of  your gross income to go to your total debt payments - and FHA can be even more "generous."  This is an insane way to go into home ownership! 

Reasons Not to Borrow as Much as You Can

A lender may approve you for a mortgage up to a high amount, but it might not make good financial sense to borrow all that money if your other, non-home-related debts are high. For example, if you have plans to renovate your home or your home will be expensive to maintain, that may throw your carefully planned budget out of alignment. You might have other expenses that take up a significant portion of your income, such as daycare costs, college tuition and medical bills. 

Consider your long-term financial goals. If you have credit card bills you want to pay off quickly, you can pay more than the minimums due each month, but that might make your total debt payments too high to manage with a large mortgage.  Consider your life style.  You might be able to afford that big mortgage payment - but will you be eating ramen noodles for the next three years?  Will you have to forego vacations and evenings out with friends because your mortgage payment takes all your disposable income? If you plan to buy a new car sometime soon, a car payment plus a high monthly mortgage payment could be hard to manage. If you want to set aside money for retirement or for your children’s college education, take those goals into account.

Don’t Take on More Debt Than You Can Handle

When shopping for a home, it’s easy to get carried away.  That lender may be happy to lend you a big amound of money, but you don't have to take it all!  Remember that you are going to be the one making the payments - not the lender!  Just because you can borrow a large sum of money, that doesn’t mean you should.  Look at your entire financial picture and make a responsible decision that will allow you to cover all your bills and live comfortably.

Finally, be sure to pick a Realtor who understands and respects your financial goals.  Chances are there are a number of homes that will meet your wants and needs - and many of those will not break your bank.  Don't get sucked into a bad financial decision by a Realtor who tells you that it is just a little more each month to get the house of your dreams!  That Realtor isn't making your mortgage payment - you are! 

 

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Ron Barnes 08/23/2019 05:31 AM
  2. Ginger Harper 08/23/2019 11:47 AM
Topic:
Home Buying
Tags:
mortgage payments

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Ambassador
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Lise I completely agree.  Just because you can qualify to borrow up to a certain amount does not mean you should.  Lenders only take into consideration a borrower's debt that shows up on a credit report, which means there are a lot of monthly expenses that are not calculated into the Debt-To-Income Ratio like food, gas, clothing, vacations, and so on.

By the way these days lenders will allow up to a 50% Total Debt-To-Income Ratio on Conventional Loans, and a 45/55 on FHA loans.

Aug 22, 2019 08:09 AM #6
Rainmaker
3,336,049
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hi Lise - what a lender approves for a mortgage is one thing and that number is quite helpful but it is NOT necessarily the number you need to commit.  Comfort along with other factors come into play.  

Aug 22, 2019 09:20 AM #7
Rainmaker
52,699
Steve and Eleanor Thorne
Equity Resources, NMLS 60596 - Clayton, NC
Mortgage Loan Johnston County

Great Advice!  WE very much agree with this.  If you are searching through the cushions of the sofa to pay a babysitter - you are probably not ready to buy a home!

Aug 22, 2019 12:44 PM #8
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Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
Charlotte Homes for Sale - Charlotte Neighborhoods

It's funny, I always try to go the other way too, Lise! They say they want a $500K house, I try to find them what they're looking for at $450K - give them a little more wiggle room for living IN their home, not FOR it!

Aug 23, 2019 12:15 AM #9
Rainer
520,377
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Great share, thanks!

When shopping for a home, it’s easy to get carried away.  That lender may be happy to lend you a big amound of money, but you don't have to take it all!  Remember that you are going to be the one making the payments - not the lender!

Aug 23, 2019 04:04 AM #11
Ambassador
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Wanda Kubat-Nerdin - Wanda Can!
Prado Real Estate South - St. George, UT
So Utah Residential, Referral & Relocation REALTOR

Thank you for this important post Lise. I have seen people (not my clients) purchase a home, then are unable to furnish it or complete the landscaping because they become 'house poor'. Buy what you can afford, rings high and congrats on the feature!

Aug 23, 2019 05:44 AM #12
Rainmaker
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Scott Godzyk
Godzyk Real Estate Services - Manchester, NH
One of Manchester NH's Leading Agents

I had a a prime example this week, a single mom of 2 kids, buying a home on her own. But the loan officer gave her a ceiling that was very high and of course she wanted to look in that range, the highest. Now she told me how much she pays for rent and that she doesnt like being left with no money to have fun or do or go anywhere with the kids. The mortgage, taxes, insurance will be just under that at the highest amount. I asked her why she would not want to get a home at a lower price so she can have the money to do what she wants. Because the loan officer said i can buy a home at xxx price and i will. Was the reply. 

Aug 23, 2019 05:44 AM #13
Rainmaker
1,678,561
Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker and Attorney Licensed in DC, MD, VA,

Scott Godzyk - those stories are so scary to me!  I just feel for the future that woman is buying for herself! 

Aug 23, 2019 06:43 AM #14
Rainmaker
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Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

You point out just one of the many reasons it's so vitally important to choose your lender carefully, Lise Howe ... and then have an in-depth financial conversation with them prior to viewing homes.  While valuable gauges, the numbers don't always tell the full story.  A good lender fulfills a larger role than someone that facilitates a mortgage alone ...

Gene

Aug 23, 2019 08:15 AM #15
Rainmaker
752,641
Jill Sackler
Charles Rutenberg Realty Inc. 516-575-7500 - Long Beach, NY
LI South Shore Real Estate - Broker Associate

You couldn't have said it better. Being house poor is no fun and it doesn't take long for your dream house to turn into your nightmare.

Aug 23, 2019 12:18 PM #16
Rainmaker
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Jim Patton
Aspire Home Real Estate 209-404-0816 - Modesto, CA
Realtor - Stanislaus ,Merced, San Joaquin Counties

Hi Lise Howe this is a conversation that I have with all of my buyers.  Just because the bank says you can doesn't mean you should.  Great post!

Aug 23, 2019 01:59 PM #17
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Jeff Dowler, CRS
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude

Hi Lise:

This is such wise advice for buyers. They often do not understand how the lenders come up with their pre-approvals and how this can be very different from the realities of one's personal budget. I always talk with buyers about this issue.

Some are not even aware of how much per month that huge mortgage that allows them to get their dream home is really going to cost them. It can be a big shock when they look at what their budget really is.

Jeff

Aug 23, 2019 08:38 PM #18
Rainmaker
2,303,690
Anita Clark
ColdwellBanker SSK Realtors ~ 478.960.8055 - Warner Robins, GA
Realtor - Homes for Sale in Warner Robins GA

Lise: Being house poor can create an unhealthy life/work/fun imbalance. Whenever possible, it makes sense to find something a little less expensive and leave yourself some wiggle room.

Aug 24, 2019 03:44 AM #19
Rainmaker
3,254,744
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Realtors - Luxury - Divorce

Agreed....though I think it can and does go both ways..Buyers can have a number stuck in their heads and find the dream house is not available at that price...and pass on affordable castles as a result.

Aug 24, 2019 05:42 AM #20
Rainmaker
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Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning Lise Howe -  I know that people can be surprised that they can borrow so much but it is better to go below that in most cases.

Aug 24, 2019 07:47 AM #21
Rainmaker
3,169,847
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Lise Howe, I am amaze that some people just think bigger is better but they forget that down the road there could be something that happens and they need to sell fast.

Aug 24, 2019 08:38 AM #22
Rainer
144,879
Robin Wells
RAW Chimney Sweep and Inspections - Penetanguishene, ON
Giving Peace Of Mind One Chimney At A Time

Thanks for post and some good advise.  Mortgages and the commitment and lack of flexibility or options that one has with a large one is scary.  What happened to the days when one started small and moved up as they could afford larger homes?

Aug 25, 2019 04:22 AM #23
Rainmaker
1,304,359
Wayne and Jean Marie Zuhl
Samsel & Associates - Clark, NJ
The Last Names You'll Ever Need in Real Estate

I've encountered many people who should have taken your advice. Now they're barely making ends meet and their house is under water.

Aug 27, 2019 06:03 AM #24
Rainmaker
1,678,561
Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker and Attorney Licensed in DC, MD, VA,

Wayne and Jean Marie Zuhl  - thanks for the comments - it makes me so sad when people are upside down

Aug 27, 2019 01:06 PM #25
Rainmaker
1,218,945
Sheri Sperry - MCNE®
Coldwell Banker Residential Brokerage - Sedona, AZ
(928) 274-7355 ~ YOUR Solutions REALTOR®

Hi Lise Howe,

I see why your post was featured! Most people need to read and absorb all that it states.  There is probably a small percentage of people who may look at a home as their forever home and want to take on the extra debt.  They may also be looking to the future and know they will be in a much higher income bracket moving forward. It still is risky but they understand and know the risks and are calculating that against the losing their forever home. 

Aug 29, 2019 08:22 AM #26
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