It’s true that the first thing you should do when you’re thinking of buying a house is shop for a mortgage and get preapproved, that way you’ll have an idea of what housing price range you should be looking at.
It also assures the real estate person that you’re able to follow through with financing, should you want to put an offer on the ‘perfect’ house.
However, though the bank should be your first stop, what they say you can afford for a house, is not always realistic. You need to take the process one step further and do the math for yourself. So before you start looking, you need a two-step analysis – the bank’s and your own.
Why? Because the bank is not aware of all your other regular non-negotiable expenses, some of which can put you in a tight bind, when you start paying a higher mortgage payment than you can practically afford. That’s because they’re not aware and/or never ask about such costs.
Of course there are always some non-priority expenses that you can chose to forgo or eliminate from your budget such as sports memberships and fees, eating out, frequent vacations and other forms of entertainment or non-essential purchases, in order to make your home ownership affordable, but it’s the other costs that might be unique to your family, that usually aren’t factored in as expenses, but should be.
Mortgage specialists tend to look at things like your credit payment history, current loan obligations, expected revenue and average household utilities or a preset common cost. They entirely miss the boat when it comes to ‘other expenses’ most of us have, in some form or other.
They also base this long-term financial commitment on your combined current revenue remaining the same, for the entire mortgage period, in calculating what you can afford in a mortgage payment. This is unrealistic. How many couples never have a decrease in revenue in say twenty, thirty years or more for some reason or other. You need to get real when it comes to projecting future revenue, as well as expenses.
There’s also a general rule of thumb that is considered in getting a mortgage, such as your debt-to-income ratio, which unfortunately doesn’t consider all the necessities of life or unrelated expenses.
That’s where your own analysis comes in. You should know what you spend monthly on child care, special dietary needs, health premiums and non-covered medical expenses, property/auto/life insurances, commuting costs and memberships for regular family activities.
If you’ve been reluctant to take a close look at these costs, going into a mortgage blind is only setting you up for some financial pitfall, to what could otherwise be a workable, affordable and comfortable mortgage duration. These costs can be substantial and they are not going away once you start making payments on your new home.
Taking the time to factor in your average monthly expenses in calculating what you can afford in way of a house payment, not the bank’s standard list of expenses, can reduce financial stress over the term of your mortgage.
And when it comes to household utilities, cooling/heating, property insurance and taxes, the best rule of thumb is to estimate what your new home’s expenses might be and not base your projected expenses on your current abode’s costs, which may lower than what you’ll pay once you move.
If your vehicles are older and subject to breakdowns, you’ll also want to factor in a certain amount for repairs, maintenance and eventually, replacement. And don’t forget to allow a budget for house maintenance and repairs, something that is unavoidable during the length of your mortgage and a cost that many do not consider. A home that is allowed to go into disrepair, will devalue over time. Like it or not, this is one investment that must be maintained for the long term.
Want to really know what you can afford for a house payment? Discuss it with the bank, but then add your own ‘unique’ monthly costs to the mix to get a more realistic financial picture.
And since there are always unprecedented, unplanned and unforeseen expenses, it doesn’t hurt to downsize your expected mortgage payment by another 10%, because life does happen and you’ll sleep better knowing your mortgage payment is comfortable. You’ll also want to allow a little for retirement and savings.
Too many couples jump into difficult-to-manage mortgage payments without fully considering the full gamut of expenses, all the while basing their revenue projections on both earning top dollar, for the long haul. This can be a recipe for disaster. Don’t set yourself up for a financial let-down in the future.
Home ownership is a wonderful experience, but only when it’s manageable. And remember to chose a house that fits your family, lifestyle and budget. One you can afford to pay for and maintain, rather than base your house-shopping decisions on must-have eye candy, that satisfies only for the moment. You’ll be the winner in the long run.