Why the Mortgage Your Lender Offers You May Not Be the Amount You Should Borrow

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  • There are different factors lenders consider when giving out mortgages.
  • Ultimately, only you have the best handle on your financial picture.
  • Do your own calculations when signing on for a mortgage.

It's important to crunch your own numbers.

Years ago, my husband and I were thinking about moving from our current home to a new one that would've required a larger mortgage. When we went to get pre-approved for a mortgage, we provided our lender with a host of financial information. From there, we got a pre-approval letter stating that we could borrow a sum that was way more than the amount we were thinking of borrowing. In fact, the number on that document looked really high to us.

Now in the end, we didn't end up moving, so we didn't apply for a mortgage at all. But had we applied, we would've stuck to a much lower number than what our lender was willing to loan us.

If you're looking to buy a home, it's important not to rely too heavily on the amount your lender says you can borrow. Instead, it's best to crunch your own numbers so you don't wind up in over your head.

The dangers of borrowing too much

If you take on too high a mortgage, you might struggle to keep up with your payments. Or, you might struggle to keep up with your other bills, whether it's your property taxes, utilities, or groceries.

Now there are different factors that mortgage lenders take into account when determining how much a given loan candidate can borrow. Specifically, lenders tend to look at your:

  • Credit score, which measures how risky a borrower you are
  • Debt-to-income ratio, which measures your existing debt relative to your income
  • Income from all sources
  • Assets on hand, such as savings in the bank

All of these factors can give lenders a snapshot of how much you can reasonably borrow in the course of buying a home. But ultimately, lenders don't know your financial situation as well as you do. That's why it's important to think about your total expenses and the extent to which they might limit you in the mortgage department.

Let's imagine that your only debt right now is a low-cost auto loan. Based on that, you might present as a candidate with a low debt-to-income ratio, which could work in your favor with regard to getting a mortgage. But while you may not have a lot of debt, you might have a number of costly expenses your lender doesn't know about.

Say you have two children who need full-time care while you work. You may be spending $500 a week on daycare just to hold down a job. That's information you're not necessarily providing your lender with -- but it's relevant information that should factor into your decision of how much to borrow.

Don't go overboard

As a general rule, it's best to keep your total housing costs to 30% or less of your take-home pay. And that 30% should include not just your mortgage payment, but also your property taxes, homeowners insurance, and any other predictable housing expenses you're on the hook for, like HOA fees.

If you're offered a mortgage that will cause you to exceed that 30% threshold, you should strongly consider borrowing less. Similarly, you may decide you want to keep your housing costs to 20% of your take-home pay if you have lots of expenses you're committed to.

All told, you're really in a much better position to assess your financial picture than a mortgage lender. Keep that in mind as you decide how much to borrow for a home.

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