If you are reading this you are likely on the path to either purchasing a home for the first time or you are looking to buy your next one. Perhaps you have even gone through the pre-approval process already and were shocked when your lender came back with a higher sales price range than you were expecting.
If you were pre-approved for $300,000 it means you can afford the monthly mortgage payment that goes with it, right?!? Maybe, maybe not.
When lenders are assessing what price range you can afford during the home buying process, they are not doing a full lifestyle or cash flow analysis. Lenders are looking for debt-to-income ratios (black and white) rather than the lifestyle choices that we make and what our actual monthly budget is!
For instance, meet Joe Smith. Joe has a VERY low debt-to-income ratio. He is a lender’s dream client and has a high sales price max to go home shopping with. BUT before he schedules his first showing, Joe made a wise decision! He asked his lender to show him a loan estimate at his max price to get an idea of what his monthly mortgage payment would be.
When Joe got the loan estimate he realized that the lender had never asked him what his current monthly budget is. In fact, come to think of it, Joe didn’t even know what his actual budget was. He just knew that there was always money in his bank account and he was saving a lot of money in his retirement and travel accounts. (Boy does Joe love to travel!) When he saw that his monthly mortgage payment would be over $2,000/mo, Joe suddenly didn’t think buying a $300,000 house was so great.
*Joe LOVES to eat out. He works hard and doesn’t want to cook. He isn’t willing to sacrifice that to account for a high mortgage.
*Every year Joe travels overseas for extended periods of time. He spends at least ⅓ of his annual income in travel.
*Next, Joe is committed to retiring early. His motto is to pay cash and save for retirement until he retires one day with no debt. (Great goal.) To do that, Joe can’t take up a ton of monthly cash flow to divert into a mortgage that he feels will rob him of his future.
So, what does Joe do? Joe works together with his real estate agent to decide what price range is in line with how he lives his life and what he is willing to spend on his monthly payment. Come to find out, Joe’s comfort point is at $200,000 or less.
So how do you figure out what monthly mortgage payment is comfortable for you?
I recommend BEFORE even getting pre-approved, that you begin with setting up a monthly budget and debt stacking plan (if debt is a concern for you). This is what I call laying your financial foundation and it is what we teach in our Path to Home Ownership program. I then teach to practice using that monthly budget for 2-3 months BEFORE getting pre-approved so that you know you are comfortable in maintaining a budget. Ideally, your mortgage payment would be at or less than ⅓ of your total income, but many lenders will still lend if you are closer to ½.
Base your practice monthly budget around your ideal mortgage payment, not what you are currently paying in rent. This will give you a realistic picture of whether or not you are truly financially ready to take on a mortgage.
In addition to creating a monthly budget, I also recommend meeting with a financial adviser who is willing to help you create a simple step-by-step plan to stack and eliminate debt as well as set up a financial plan that is realistic.
For some free resources on budgeting you can also go to thebudgetmom.com. There you will find savings trackers, budget sheets, and more. If you are ready to also meet with a financial advisor just send an email to email@example.com and Gina will connect you!
Questions? Call 717-963-0016.