Picture courtesy of ResPres
 
My niece Beth,who is considering purchasing her first home recently asked me…”Can you refer me to a mortgage company who can tell me how much I can afford to spend on a home?” I believe that it is at this stage where most of the purchase mistakes are made.
Beth like so many of my other clients recently graduated from one of our prestigious local Universities. She has her first “real” job and is anxious to purchase a starter home. She is excited and filled with good intentions. However, she was falling into the first and potentially most dangerous buying trap. Never let someone tell you how much you can afford. No real estate agent or mortgage lender understands you and your lifestyle better than you!

Many real estate agents and mortgage lenders will ask the following…”What are you considering purchasing?” This is a good question. However, when asked what they want, many buyers will often respond with something they may not be able to afford. I suggested to Beth that she needs to sit down and prepare a budget. What are her present bills? What additional expenses can she expect after purchasing a home? What is her monthly income? (Please do not budget for raises unless you are 100% confident when they will arrive.) What are her tax liabilities? What does she want to set aside for a rainy day fund and how much for retirement? The answers to these questions are critical to determine how much you can afford.

Beth did the exercise and shortly thereafter sat down with me to discuss getting pre-approved for a mortgage. I was so proud of her. She laid out a budget even more detailed than I suggested. She was in control of her situation. We determined what she could afford by estimating interest rates, property taxes and insurances. She is now beginning her search.

I spoke to Beth’s mortgage lender today. He was happy to announce that Beth was now preapproved for her desired price range. He mentioned that Beth could afford to spend more. I laughed and respectfully disagreed. Most lending institutions determine affordability simply by calculating your current income to debt ratios. Only Beth knows her goals, aspirations and lifestyle. I am confident that Beth will find a house that she can be proud of and stay within HER budget!