I sometimes get annoyed when I ask a question and the answer I receive is another question, but I am often guilty of that response myself. So when I am asked “How much can I qualify for?” by someone that wants to be prequalified for a mortgage, I often answer with a couple of questions. First, “How much do you pay now for housing?” and “How much are you comfortable budgeting each month for housing?” From there I work to calculate debt to income ratios to see if the homebuyers budgeting expectations are in line with underwriting guidelines.
It is tempting, but dangerous to find a house and then reverse engineer a budget that is dramatically different from one’s current spending habits. Don’t get me wrong, it’s great to trim unnecessary expenses out of the budget, but people need to be realistic about what changes they are willing to make about their expenses and how it affects their overall happiness. Instead of just telling the homebuyer the maximum amount they can borrow and still get approved, we have a deeper discussion about what they can truly afford.
Every new homebuyer should create a household budget, especially when the home purchase results in an increase in their monthly housing expenses. Consider all expenses when creating the budget. There are a number of expenses that a lender won’t consider when qualifying a buyer such as tuition, medical insurance, prescriptions, as well as discretionary costs. These can be major expenses and will impact how much is available to pay for a home. Depending on lifestyle, travel and hobby expenses can greatly impact a household budget. Pricey hobbies like golf and skiing, or even pets can take a bite out of a monthly budget.
At least one of the line items on a budget should be savings. This can be for retirement, college, or any other financial goal. All of these costs are real and should be considered by a homebuyer when deciding how much they are willing to pay for the roof over their head.