Is your mortgage approval what you can truly afford?

You have been approved for a mortgage, and the amount is much higher than you expected! This is an exciting feeling, and you might be tempted to increase your buying budget and go all out on a home that matches your approval amount. However, your mortgage approval doesn’t always match what you can really afford. Just because you have been approved for a more expensive mortgage, that does not mean you should stretch your budget limit. Here’s why this is not always the case, and what you can do as a buyer.

What is your approval?

When you are approved for a mortgage, it means your lender has provided you with a certain amount of money they will finance for the purchase of the property. Your lender will have analyzed your financial situation, including your credit score, debt levels, assets, income, and employment in order to determine this amount. The 5 Cs (credit, collateral, character, capacity, and capital) are an easy way to understand how your approval amount is calculated. For example, a borrower with a high credit score, a proven history of creditworthiness, and a demonstrated ability to support a mortgage will often secure a mortgage approval. On the other hand, someone with poor credit or a history of missed payments is more likely to struggle during the approval process. 

You likely secured a pre-approval earlier in the buying process as well. During this stage, your lender would have given you an estimate of the mortgage amount you might qualify for, based on your financial situation at that time. The pre-approval process is not as intense, and since it is just an estimate based on one snapshot in time, it doesn’t guarantee you a mortgage. If your approval amount is different from your pre-approval, it is likely because your financial situation has changed somewhat.

Your approval is not always what you can afford

It’s a natural assumption that whatever amount you are approved for is the amount you can afford in a mortgage. After all, it is based on stringent lender calculations. However, there is a difference between approval and affordability. Unfortunately, although you may be approved for a certain mortgage amount, you shouldn’t automatically assume it is what you can afford. Your approval is simply what you are able to pay, but this is under the assumption that your mortgage is your number one payment and priority. For instance, it doesn’t consider costs for things like childcare, medications, travel, or retirement savings. Presumably, you have other items you need money for, but since every person is unique, your mortgage approval doesn’t account for these items with total accuracy. The risk here is that if you spend all your money on your mortgage, you won’t be able to comfortably afford the other aspects of your lifestyle. You need to consider your quality of life!

The biggest danger of dedicating all your money to your mortgage is the risk of becoming house poor. This means the majority of your income must go towards supporting homeownership. People who are house poor are more likely to struggle with debt, have difficulty making mortgage payments, and face the possibility of defaulting on their home. This is certainly not a desirable circumstance!

Use a broker to determine your budget

So, how on earth can you know what you can really afford? This is where a mortgage broker comes in handy. As mortgage professionals, we can examine your complete financial picture, taking in all of your expenses and future plans. We can help you determine how much money you need to contribute to each item, and how much you want to save. From there, it is easier to learn the amount you can comfortably afford in a mortgage. As you prepare to meet with a broker, think about what you want to use your money for, now and in the future. The more specific you can be about your financial plans, the easier it will be for your broker to help you map out a proper mortgage budget.

Securing your mortgage approval is an exciting moment, because it means you are very close to becoming a home owner! However, try not to get ahead of yourself if your approval amount is on the higher end. Remember to consider the rest of your financial needs outside of homeownership, and how you can budget wisely. Of course, to get the most accurate idea of what you can afford, let a broker be part of the process! We are happy to help you navigate the market and your approval.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.