Can I really afford what they approved me for?

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FOCUSING ON YOUR GOALS. 

Congratulations, you did it, you got approved for a home loan! Now what? If you are like some of our clients, you may have done a double take when the lender told you how much you were actually approved for. Before we get ahead of ourselves, hopefully you will appreciate this little moment of honesty and truth.

Initially, you had some price point in mind, you thought you would conservatively spend 100k, 150k, or 200k on your home (this number is different for everybody). Then you were surprised to find out that you were approved for much more than you expected. Before you start upgrading, let’s make sure you are keeping your eyes set on a home that fits your goals. Let’s break it down, your monthly payment is made up of four or five different components; the principal (the amount you borrowed), the interest (the amount you are paying to borrow the principal), the taxes your county collects, and your home owners insurance costs. Private mortgage insurance would be the fifth but is only applicable under certain loan programs. 

A large pre-approval can be distracting because obviously we hope that the lender wouldn’t do anything to put us in a bad position right? Before we move forward, we’d like to point out that we are not using this opportunity to pick on lenders, we work with some great ones that put people first; however, we do want to provide you with some insight on the lender’s perspective so that you are educated on their decision making process. Most lenders think that you will use up to 36% of your income to pay back your debts on a monthly basis. Of that 36%, they assume you can spend roughly 28% of your income on your monthly housing payment alone. That leaves 8% to cover your car note(s), student loans, medical bills, credit cards, etc. Can you pay all of these bills with 8% of your monthly income? If you can, that is excellent, but chances are, many of you may struggle to do that.

At our core, we believe in putting people in a situation that is a blessing and not a curse, so these four steps will help you get a better idea of how much home you can really afford. 

1.) Do the Math.

You are an informed adult, so you probably have a good idea of what your credit looks like. If not, annualcreditreport.com or creditkarma.com may be a good place to start. You can find plenty of mortgage calculators online, as long as you plug in the correct information, you will get an approximate figure that you can use as a reference point (remember you want to account for principal, interest, taxes and insurance) so do your best to fill in the blanks, your agent can help you with this as well. 

2.) Work the numbers.

A budget is your friend. If you have a working budget you are ahead of the game, if not, now is a good time to start one. Determine how much money you are currently spending on your living expenses and compare it with the number you came up with in the last step. Is there a wide margin? Now you can retool your budget to see if that mortgage payment is within reach. Maybe you can spend less on entertainment each month, maybe you can pull from your groceries, and maybe that daily coffee you get in the morning is keeping you from owning a home.  Either way, a budget will help you identify how ready you are for a mortgage payment. 

3.) Give it a try.

Take a few months to make those changes in your budget and see if the mortgage payment you are expecting is achievable. Perhaps, your morning coffee is important to you, now is when you can determine what fits into your budget and what works best for you. Don’t forget you will also want to take into account that you may have some home repairs or maintenance costs as well as a difference in utility and insurance costs.  

4.) Make a decision

Based on your newly collected information, you can make adjustments to help achieve your goal of homeownership. Ultimately you will have a good understanding as to whether or not it is the right time for you to become a home owner. Mortgages can last for 15 to 30 years so making the correct decision is important to your financial future. 

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