Personal Finance

When buying a house, mortgage pre-approval isn't a blank check

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, make one . 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 $100,000.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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