As a Mortgage Loan Officer I find myself starting the teaching portion of my meetings by educating borrowers on the difference between what they can afford and what they are/could be preapproved for.
WHAT CAN YOU AFFORD?
Knowing what you can afford is knowing your comfort number. Ask yourself, what are you currently paying and what amount of money do you have extra per month that you can increase your housing payment by? Sometimes this answer is, $700 currently and we are saving $300 monthly to be applied to our housing. Other times the answer is, $1000, but we are not saving anything per month. Knowing what you can afford is critical. Unlike other areas of life, your housing payment is not one you want to inflate or push yourself on. If you do not feel comfortable, I do not recommend stretching yourself. Comfort in your housing payment is essential when exploring future mortgage payments.
HOW TO DETERMINE WHAT YOU CAN AFFORD
Start with knowing what you currently pay in housing. Write this number down. From there, review what you are currently expending for fixed and variable expenses. A fixed expense is one that does not usually change, and one that is required to maintain your current, ideal lifestyle. A variable expense is one that can change, be canceled or adjusted at your discretion. Arrive at a total monthly expense number (TME).
Next, calculate your total income per month. It is best to calculate ONLY on your guaranteed income. If you have variable income calculate off your average or lowest months income. If you have a side hustle, do not include this amount unless you have an average that has stayed consistent for 6-12 months. Both, what you can afford and what you are preapproved for will be calculated on the conservative side of your income, so be honest with yourself when doing this calculation. It will not help you in anyway to believe or inflate what your income is just to make yourself feel better.
Once you know your income minus your TME. The amount you have left over is the amount you have to either save, invest or re-prioritize (SIRP). I am not going to suggest you take this value and leverage it as a direct amount to apply to your housing, but it helps you understand what cash you have available to work with. From there, you determine how much of your SIRP are you willing to tie up in a larger fixed expense.
In addition to determining your SIRP. It is also critical to determine if your current housing payment plus your chosen SIRP increase is 20-25% of your total income. You can determine this by taking your total housing payment + SIRP/Total Income=.00%.
Knowing what you can afford before you start house hunting or meeting with a Realtor and Loan Officer is a step that puts you in the drivers seat of your financial destiny.
"What I can preapprove you for is different than what you can afford."