3 differences between Loan Approval and Loan affordability

​Home mortgages can be a complicated and intimidating subject. Media projects that it is only for the wealthy and that there should be fear over interest rate volatility. However, I am here to education you on how you can bypass some of that noise and stay focused on what truly matters. To purchase a home you will need a Pre-Approval letter from a Mortgage Advisor (MA), but what this MA can offer you is not always the same as what you feel comfortable or willing to pay for your future mortgage expense.

Here are 3 things that are different between a Loan Approval value and a Loan Affordability value:

1. Loan approval is based on an applicant's creditworthiness, while loan affordability is based on an applicant's income and expenses. Creditworthiness is how confident the lending institution is in your likelihood to pay back the money you are borrowing. If you demonstrate through your expense management history that you are responsible your ability to borrower more money increases. Loan affordability is based on how comfortable you are in spending your money on a new expense.
2. Loan approval is typically a faster process than loan affordability, as loan affordability requires more detailed information. When a MA is looking at if a borrower is able to be approved for a loan amount. They are taking various data and plugging it into a formula. If the formula produces the quantifiable number that the bank deems necessary a pre-approval is granted. This does not pertain to the calculations that you might feel comfortable spending. Approval is a formula for credibility and a thumbs up on financial risk management and affordability takes time to calculate based on ones personal budget and spending history throughout the month.
3. A loan approval is based on the amount of money one makes in their gross compensation, where loan affordability is based on a percentage of your net income. Gross income is the amount you are paid prior to any expenses being taken out of your paycheck. Where as, affordability is calculated off of the funds that are actually deposited into your bank account. 

It is my recommendation that prior to working with a MA you calculate what you are most comfortable spending based on your net income which is monthly deposited into your bank account. My recommended housing expense is between 25-35% of your net income per month. For example: $1000 take home income x .35% equals $350 for your housing expenses. This would include the Principle, Interest, Private Mortgage Insurance, Taxes, Insurance & Utility costs to operate the home. Once you know this number, then practice spending it in your budget for a few months. If it feels possible, then take that number to a MA and ask for a pre-approval based on the amount you feel you can afford. 

If the MA you are working with does not ask, "What is the amount you would feel you can afford on a mortgage per month?" I would consider this a red flag and look for a different professional to work with. 

If you would prefer I help you figure out that number, reach out and I am happy to assist. The more equipped you are in what you can afford the more likely you will feel confident and in control of your home buying process and not influenced by the noise around you.