How Your Bank Could Steer You Wrong When It Comes to Your Mortgage

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  • Many people borrow as much as their bank allows them to.
  • Trusting your bank too much could be a big financial mistake.
  • Borrowers shouldn't assume their bank has a full understanding of their financial goals.

Don't assume your bank has your best interest at heart when approving you for a mortgage loan.

When you apply for a mortgage loan with your bank, or another loan provider, it's important you go into the transaction prepared. Unfortunately, many people make a simple mistake during the mortgage application process by trusting their bank to make a key choice for them. This could end up being a financial disaster.

Here's how your lender could end up steering you wrong, and leaving you full of regret after you've borrowed to buy a home.

Don't rely on your bank to make this mortgage decision for you

The big mistake that many home buyers make when it comes to their mortgages involves relying on the lender to tell them how much they can afford to borrow.

See, mortgage lenders review some key factors when deciding how large of a loan to offer you. They consider your income, the current amount of debt you have, and your credit score. Based on this, they'll decide how large of a loan to approve you for.

Typically, lenders want to give you as much money as they are confident you can afford to pay back. However, the information they use to make this assessment is limited.

Lenders don't know about other financial goals you might have, such as saving enough for early retirement or being able to keep your costs low enough to stay home with your future children. They only know how much you can afford based on your current income, and they're aware that you'll likely make huge sacrifices to avoid foreclosure. Frankly, they don't really care much if they lend you enough that you can't accomplish other things you want -- as long as you're still making your payments, they'll make their profit.

How should you decide how much to borrow?

Borrowing as much as your lender will allow could leave you feeling house poor and trapped in a situation where other life goals are out of reach because you have committed to pay so much for a home.

The best and only way to avoid that undesirable outcome is to make your own decision about how much of your income to spend on a home -- and stick to your pre-set limit regardless of what the lender is willing to allow.

You should carefully consider your current and future goals, your plans for your career, and how large of a mortgage payment can fit into your budget. Then, work backwards from there to see how much you can borrow and still keep payments comfortably within your limits. Once you know how much you're willing to spend on monthly housing costs, you can decide on the upper limit of the amount you wish to borrow to keep your payments within your pre-set threshold.

By taking this approach, you can make the decision about what mortgage is affordable with a more holistic view of your finances, rather than with the goal of maximizing the bank's profit. You're much more likely to end up with a loan that's the right size for you, rather than one you regret.

Our Research Expert

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