How Big of a Mortgage Loan Can I Afford to Get?
I cannot answer the "how big" question, but I can explain how to answer it for yourself. The first thing you should do is revise the question you are asking. Instead of asking how big of a mortgage you can handle, ask how much you can afford to pay on a monthly basis toward your housing costs.
When homeowners run into affordability problems with their mortgage loans, it generally happens at the monthly level. In short, the size of their monthly mortgage payment exceeds their net monthly income (i.e., take-home pay).
This can happen for a variety of reasons. Sometimes, the homeowners start out with an affordable loan, but circumstances change later on down the road. We are seeing a lot of this right now as so many people are losing their jobs.
In other cases, the mortgage was too big for the homeowners to afford right out of the gates. You might ask how this could happen. Don't the lenders review people up front to prevent this kind of thing? Sometimes they do, and sometimes they don't. Mortgage lenders know they can sell loans into the secondary mortgage market, which essentially removes those loans from the lender's books entirely. So if the homeowner defaults at a later date, it's no longer a concern for them.
How Big of a Mortgage - Two Important Points
When you ask how big of a mortgage loan you can afford, you need to understand two important concepts. We have touched on both of them above, but I want to restate them for clarity:
- Point #1 -- You should never let a lender tell you how big of a mortgage you can take on. All they can tell you is what they're willing to lend you -- but that's it. They are not your financial advisor. They are looking out for their own interests, not yours. And they can always sell mortgages into the secondary market to avoid long-term risk.
- Point #2 -- You must determine your home-buying budget before you start shopping for a house or a mortgage. You must do this by establishing a monthly budget, taking into account your monthly income versus expenses. This article explains how.
If you keep these two points in mind when shopping for a home loan, you'll be less inclined to take on a mortgage that's too big for you. Do the budgeting math to figure out how much you can afford each month, and then stick to that number. That's your cap. Don't let a lender talk you into anything about that amount.
House Poor vs. Mortgage Foreclosure
To reinforce the lesson, let's talk about the two common scenarios that can occur if you do take on a mortgage that's too big. Most people who go down this road end up "house poor" or in foreclosure -- or both.
House poor means that you spend so much on your mortgage payment each month (relative to your income) that you cannot afford to do any of the things you used to do ... or the things you want to do. Your friends call and invite you out to dinner, but you have to decline because you have no money. Your mortgage payment gobbles up your entire paycheck every month. Remember, buying a home is supposed to improve your quality of life, not take away from it.
Foreclosure is another common scenario when people take on mortgage loans that are too big for them. I probably don't need to tell you how serious this problem is right now, because you hear about it every time you turn on the news. The foreclosure crisis is one of the primary catalysts that drove our economy into a recession through 2008 and 2009.
This article answers the question: How big of a mortgage can I afford to take on? If you would like to learn more about this important topic (and I suggest that you do), be sure to review the articles listed below.
Related articles:
I hope this answers your question, and I wish you well in your home buying process. Good luck.
Labels: Home loans
posted by Brandon at
7:25 AM
