You finally reach the goal of Approval to buy a home, but can you afford what the lender approved? I have had many buyers during my career as a real estate agent. Often many buyers do not take time to KNOW what they can afford. Buyers get approvals back from the lender and are shocked at how much the suggested amount is. Just because a lender approves you for an amount doesn’t mean this is best for you. Lenders usually expect your housing cost not to exceed 35% of your income. Sadly most buyers never take a moment to see how much that is when planning to buy. To give an idea of this amount, if you make $4800 per month, that is $1,680. On the internet many lenders and real estate agents offer calculators which are usually designed to help you get a figure much like this one. One thing that you the buyer must remember, is these calculators assume everyone’s circumstances are the same. We all know that no two households are the same when it comes to bills and finances. Then there are differences in credit scores that the calculators are unable to adjust.
An additional factor that I have experienced with my buyers is the consumer trends. I have had buyers tell me that they know they can afford a certain house because their friend can. Especially since the friend makes less than them, not to mention thier scores are lower. While these ideas sound good they are far from correct measures to determine how much you can afford. Such things as debt ratios, credit scores, and daily cost of living differences are the factors that make this reasoning unrealistic.
The calculator is good to decipher a good starting point or an average to expect when applying to get a loan. In truth however, the only way to get an accurate calculation of what your household can afford is to take the approval amount and set it aside briefly. Calculate your current income as the starting point. Lenders use gross income to calculate what you can afford but, it is best for you to use your net income in your calculations to be accurate. Then it is a good idea to realistically determine your monthly mandatory expenses. Once these have been deducted look over your averages for spending on other items your lifestyle dictate for comfort.
The amount you come up with after realistically calculating your spending habits usually does not match the amount you have been approved for. It most likely is better to go with your figure based on your real numbers. Further you may want to adjust your monthly mortgage allocation amount by deducting a little for savings and unexpected medical costs. At this point if you have a good loan processor you should be able to give them your monthly afforded amount. Ask them to re-work your loan based on this amount and tell you what selling price that equates to for a house purchase. Make sure they account for the amount you have available to apply to your down-payment. It is always best not to use all of your savings when buying a home.
The major reward of being realistic usually is the determining factor of the amount of happiness you have in your new home. Also, doing so will likely prevent you from having to face the loss of your home in the future.
Locate a real estate agent to assist with finding a home in your price range to save time and money. Ultimately, they know the market and which houses offer the most for your money. When finding your ideal agent give them a copy of your pre-approval letter but ALWAYS tell them the maximum amount of those funds you wish to use. Remember just because the lender says you can afford that much doesn’t mean you have to spend that much!
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