We've talked about what
mortgage pre-approval is
, and why you should get pre-approved, but I also want to address
why you should NOT trust the number the bank gives you.
What number shouldn't you trust?
On your pre-approval letter, there is a number, usually
labeled "maximum amount willing to finance" that, obviously, is
the highest loan amount the bank will approve you for. Now
you know, since you've been through the process, that this is
based on your income and credit history, so it is probably based
on what you can afford, right?
When my husband and I bought our house, of course we were
pre-approved for a mortgage, but we basically ignored the number
the bank gave us. Instead, we looked at our budget and
decided what we could afford, both in monthly payments and the
total cost of the home. Once we had decided on a monthly payment
amount that we could afford, and a total home cost that felt
reasonable to us given our income, only then did we look at our
pre approval letter. As long as it came in the same or higher
than what we decided our budget was, we didn't care.
Consider your budget
Do you have a monthly budget worked out that you adjust
frequently and stick to? If not,
. Now. If you do have a budget, now is the time to
sit down with it. Chances are you are currently paying
either rent or you already have a mortgage. Take that monthly
amount as your starting point, but we might adjust it.
Consider your total income for the month, and find out what
percentage goes to pay for housing. If it is above 25%, then your
housing payment needs to come down. Use a payment that is
20% of your total monthly income when figuring out how much house
you can afford, to give yourself some wiggle room.
If you make $50,000 per year, that works out to about $3,200
per month (after taxes). If this was my monthly income,
then I would want my maximum house payment to be $800.00 using a
25% figure or $640.00 based on a 20% figure.
Consider the total cost
Now that you have a payment in mind, let's look at how much
total house you can afford. Write down the payment number
you just figured out, and for a moment, forget about it.
What is your annual income? The total cost of your house
should not be more than 2.5 times your annual salary. If you
make $50,000 per year, then your house should not cost more than
$125,000. As you know, home shopping can very easily make you
fall in love with a house outside of your price range. (Realtors
know this and will use it against you. Keeping that $50,000
annual income in mind, use $100,000, or twice your annual salary
as a total price for a home. Again, this gives you some wiggle
room should you fall in love with a house slightly above
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