Using a mortgage calculator and getting preapproved by a lender can help you gauge what you can afford as a homebuyer. But using a preapproval figure as a homebuying budget? That’s another story.
Spending too much on your home can leave you house poor, with little cash left over for things like unexpected repairs, retirement savings, and, in some cases, even utility bills, groceries, and other day-to-day expenses. It can also make it hard to stay afloat should your income change or you lose your job.
Preapproval Isn’t a Budget
Though a mortgage lender might preapprove you for a loan of $750,000, that doesn’t mean you should spend that much — at least not without careful consideration and calculation first. In general, lenders aren’t looking out for your best interests. A larger loan offers lenders the most potential profits in the long run.
Lenders also don’t take into account your full scope of expenses. They might say you can afford a $3,000-per-month mortgage payment based on your income and debts, but what they may not factor in are the costs of your utilities, internet, trash pick-up, HOA dues, and all the other costs that come with owning a home. These will all increase your monthly expenses and, with a too-high mortgage payment, make it harder to stay afloat.
Your Mortgage Payment Isn’t Your Only Cost
A mortgage payment isn’t the only cost you’re going to have as a homeowner. Up front, you also need money for a down payment, closing costs and moving expenses. Over time, you’ll have property taxes, homeowners insurance, maintenance, repairs and more to cover. These should all factor into your decision to buy a home, as well as how much you spend to do it.
Other Homeownership Costs to Consider
- Down payment (about 5-20% of the home’s price)
- Closing costs (about 2-5% of the home’s price)
- Moving expenses
- Utility deposits
- Cable and internet
- HOA dues
- Lawn care
- Property taxes
- Homeowners insurance
As a general rule, financial experts usually recommend spending no more than 30% of your take-home income on housing—and that means all expenses related to housing, including your electricity bill, water, gas, lawn maintenance, and more. Spending more than 30% on these costs can make it hard to afford other necessities, like food, transportation and clothing.
Long term, you also want to leave room in your budget for saving. If your mortgage payment is so high that you can’t afford to put money toward retirement or your child’s tuition fund, then it’s probably not in your best interest to buy the home. You want a home that helps you achieve your long-term goals, not one that hinders them.
Falling Behind On Your Mortgage Is Costly
Finally, there’s also the threat a too-high mortgage payment poses to your financial health and overall well-being.
Consider this: In the event you lose your job or take a pay cut, you might find it harder to stay current on your mortgage payments. Late payments can severely ding your credit score and make it harder to get approved for loans, credit cards and other financial products.
If you fall too far behind, your mortgage lender can even foreclose on the home and evict you—leaving you and your loved ones with no place of residence and no revenues from the sale of your home. The foreclosure would also stay on your credit report for seven years, severely damaging your financial well-being.
Don’t Stretch Too Far
Though it can be tempting to leverage that maximum loan amount your lender gives you, try to resist the temptation. Carefully consider all the costs you will have as a homeowner, as well as your income (and the reliability of that income), and make sure you choose a property that you can comfortably afford for the long haul.
If you need guidance along the way, seek the help of a financial advisor. They can point you toward an appropriate home-buying budget and ensure you’re making the best financial decisions for your long-term goals.