This post was originally written by Eric Khan and posted to the totalmortgage.com’s website. You can view the original post here.
You’ve improved your credit and you have tax returns proving that you can afford a house –you’re finally ready to meet with a mortgage lender and get the ball rolling. Buying a home is an exciting time, but don’t let your excitement cloud your judgment and cause you to make unwise choices with your money.
When applying for a mortgage loan, the lender will look at your income and your debt to determine the maximum that you can spend on a house. Some people are happy to learn that they qualify for a sizable amount. However, just because a bank is willing to lend a certain amount of money doesn’t mean you should borrow at the top of your budget.
It might be hard to resist this urge, especially if you’ve found your dream home and it’s priced at the top of your budget. But, if you buy less than you can afford, the long-term benefits might be worth any sacrifices. Here’s why you shouldn’t spend your maximum budget buying a house:
1. The Lender Didn’t Consider Other Expenses – Lenders determine how much you can afford based on your income and information included on your credit report. This might include car payments, credit card payments, your future home loan payment, and other debts. What they don’t take into consideration are other expenses that you might have like daycare, auto insurance, or out-of-pocket medical expenses. So, from a lender’s viewpoint it might look like you can afford a certain amount, but in reality you need to spend much less on a house to keep your personal finances healthy.
2. You Won’t Have a Cushion for Repairs – Buying a house at the top of your budget might be a dream come true, especially if you find the perfect property. However, the more that you spend on a house, the more you’ll pay monthly. And unfortunately, if you don’t give yourself any wiggle room, it might be impossible to save an emergency fund, and you might not have disposable cash available for incidentals and home repairs that will occur.
3. You’ll be Unable to Save for Retirement – The earlier that you start saving for retirement, the better. Unfortunately, many young adults spend too much on a house early on. As a result, their incomes can only afford living expenses, and they can’t afford to start preparing for their futures. They neglect joining their employer’s 401(k) or starting an IRA, and some put off retirement planning until their income increases, which can be five or ten years down the road. They end up retiring with less money and working longer than expected. On the other hand, buying less than you can afford frees up money in your budget which you can use for the future
4. You’ll be Broke or House Poor – There is nothing fun about being house poor. You might move into your dream home, but this happiness and excitement will be short-lived if you’re living paycheck to paycheck and barely making ends meet because your mortgage is too expensive. All of your money might go to the house payment, and there might be little cash for the occasional splurge or a vacation.
5. You Prefer Not Draining Your Savings Account – There are people who’ve completely drained their savings accounts buying a house. This can be dangerous. You still need a cash cushion after moving into a new house for problems that can and will take place. For example, one week after moving into a house you might need to pay hundreds to fix a leaky pipe that damaged a section of the ceiling and carpet below.
If you purchase a house under budget, that’s less money you’ll have to take from savings for a down payment and closing costs. Even if you only maintain a $1,000 cushion, this is better than nothing.
You don’t need the biggest house on the block to be happy and comfortable. The important thing is that you purchase a home that adequately accommodates your family – and preferably a home that’s under budget.