Learn why your mortgage approval amount isn’t always the same as what fits comfortably within your budget.

One of the most important decisions a homebuyer makes is how much to borrow with a home loan. Learn how to evaluate your finances and determine what mortgage amount will be comfortable for you.

Why the approved amount may be higher than you can afford

When lenders review a mortgage loan application, they primarily look at income, existing debt and credit history. Generally, they want principle, interest, taxes and insurance (often abbreviated as PITI) to account for 28% or less of gross monthly income. When other debt, such as car loans, credit cards and student loans are added in, they want total financial obligations to be 36% or less of gross monthly income.

Lenders don’t typically consider daily expenses, home upkeep and financial goals when making mortgage approval decisions. Borrowing the full amount you’re approved for could result in feeling financially stressed or “house poor.”

Decide how much is affordable for you

A lender’s approved mortgage amount is a maximum loan amount, but you decide how much, if any, to borrow up to that limit. From the lender’s approved amount, subtract fixed expenses, home maintenance, discretionary spending and planned savings and investments to determine what fits your budget. In other words, you’ll account for all the things the lender doesn’t.

Fixed expenses are things you always have, such as utilities, groceries, car insurance and childcare. They are the “must-haves.”

Home maintenance expenses may vary each month, but you can be certain that at some point there will be repairs or replacement of big-ticket items, such as appliances or a roof. A common guideline is to budget 1% to 3% of your home’s value each year for upkeep.

Discretionary spending encompasses the “nice to haves,” such as eating out, entertainment and travel.

Factoring in planned savings and investments helps you prepare for long-term goals, such as paying for tuition, saving for retirement or starting a business.

The math leads to a better homeownership experience

Comparing what’s affordable for you with your approved mortgage amount can make a tremendous difference in the homeownership experience. Borrowing less than the maximum you’re approved for gives you financial flexibility, allowing you to enjoy homeownership while still having the freedom to make the lifestyle choices that matter most.

If you’d like to know how much you could borrow for a home loan, call us at 800.991.2221 or start the pre-approval online.

 

 All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications and collateral conditions.