Picture courtesy of ResPres
Many real estate agents and mortgage lenders will ask the following…”What are you considering purchasing?” This is a good question. However, when asked what they want, many buyers will often respond with something they may not be able to afford. I suggested to Beth that she needs to sit down and prepare a budget. What are her present bills? What additional expenses can she expect after purchasing a home? What is her monthly income? (Please do not budget for raises unless you are 100% confident when they will arrive.) What are her tax liabilities? What does she want to set aside for a rainy day fund and how much for retirement? The answers to these questions are critical to determine how much you can afford.
Beth did the exercise and shortly thereafter sat down with me to discuss getting pre-approved for a mortgage. I was so proud of her. She laid out a budget even more detailed than I suggested. She was in control of her situation. We determined what she could afford by estimating interest rates, property taxes and insurances. She is now beginning her search.
I spoke to Beth’s mortgage lender today. He was happy to announce that Beth was now preapproved for her desired price range. He mentioned that Beth could afford to spend more. I laughed and respectfully disagreed. Most lending institutions determine affordability simply by calculating your current income to debt ratios. Only Beth knows her goals, aspirations and lifestyle. I am confident that Beth will find a house that she can be proud of and stay within HER budget!
3 responses so far ↓
1 Susan // Jul 14, 2008 at 11:50 pm
It’s funny when the bank comes back with a much higher pre-approval – what are they thinking?
2 DeneenT // Jul 16, 2008 at 1:42 pm
This is an excellent thought, my sister is in the market for a new home and I have suggested that she sit down and re-evaluate her financial goals and aspirations. especially the way the economy is right now a buyer needs to think of the long term and stay within their budget.
3 Art the mortgage guy // Jul 17, 2008 at 9:15 pm
Being a mortgage loan officer, I must commend your thinking and actions taken. When people ask me the question “how much can I qualify for” I always answer, more than you should be comfortable paying. The truth is that as a lender, we rarely have a situation where someone can not qualify for enough loan, unless of course they have under reported income or a co-buyer who can’t be on the loan but will be contributing toward household expenses.
If you question why lenders seem to be willing to qualify borrrowers for a payment that is so much more than they can afford, my only response is that there is not a lot of logic in the lending business. Think about it. Wouldn’t it be logical not to use gross income in qualifying a buyer? Should a buyer in who lives in a municipality that has a 5% wage tax on gross income qualify for the same payment as borrower who lives down the road in a town with no wage tax? How about a buyer buying a condo, vs. a higher maintenance, higher energy cost older home? Won’t the condo buyer have a lower housing cost and shouldn’t they qualify for more? How about a growing family vs. a retired person? Won’t the growing family with 3 kids typically have higer expenses? Yet the debts ratios are the same for everyone. It’s nice to have standardized lending criteria, but putting everyone in the same box can hurt the borrower who dosn’t realize they are borrowing too much. Just because you qualify dosn’t mean you should max out your loan. Oh- by the way there is one lending program that actually does take into consideration net income, family size and utility and maintenance costs. Which program is that you ask- that would be the VA loan. You see the Veterans Administration actually cares about the financial health of the veteran. Logic from the government- hard to believe but it is true.