With floor plans, square footage, and finishes all over the map, sorting through homes — whether in Alexandria, VA, or Seattle, WA — is infinitely easier with a price point in mind. But while a lender can tell you what your current financial picture allows you to qualify for, that’s not necessarily how much home you can afford. In fact, relying solely on this piece of information can put you in a financial bind.
Credit health, income, and debt load — all key elements lenders consider — are important but not the full picture. Other factors, the things your lender isn’t required to look at, can quickly turn an affordable home into a burden or crowd out other important financial priorities. Consider these five factors when assessing how much home you can really afford.
1. Your budget and spending habits can’t handle it
Unless your expensive and growing shoe collection has resulted in a large amount of revolving consumer debt, your lender doesn’t need to know about it. They need to be aware of your spending habits only if they have adversely impacted your credit health or debt load, or if you appear to be making unusually large purchases throughout the loan process.
But spending habits, regardless of what they look like, are huge indicators of whether a monthly mortgage payment is doable or a massive financial stretch. You could already be spending every single penny of your disposable income, which would result in a growing debt problem if you throw an expensive house into the mix.
2. You’ll be faced with additional home expenses
Using front-end debt-to-income calculations (housing expenses, including taxes and insurance, divided by gross income) and back-end debt-to-income calculations (monthly debt expenses divided by gross income), lenders determine how large of a mortgage you can reasonably assume. But while they consider additional costs like property tax and homeowners insurance, they don’t consider other costs you could be incurring with a home.
If you are moving from a small apartment to a poorly insulated single-family home, your utility costs could skyrocket. Maybe your landlord paid for water and trash pickup — two more expenses you’ll now be responsible for. These costs may seem small on their own, but add them up and it’s potentially several hundred dollars a month.
Home maintenance and repairs can also be a huge additional burden. Does your home need a new furnace or a new roof? Even if you know at move-in what repairs need to be made, your lender doesn’t have to take these huge expenses into consideration. But you should.
3. You can’t reach your savings goals (or save at all)
Meeting your financial responsibilities every month without going into the red is half the battle. The other half is making sure your finances are prepared for an emergency and your wealth is growing at the same time.
Lenders want to ensure you have assets to cover a down payment, closing costs, and at least a few months of the mortgage payment, plus taxes and insurance. (The number of months depends on loan type and borrower risk.) However, they aren’t in the business of making sure you can continue to save after you assume the mortgage. That’s up to you. If the size of a mortgage crowds out essential financial moves like saving for retirement, it’s not sustainable in the long term.
4. You’re planning big life changes
Planning on leaving your job in the next six months to start a business or stay home with your kids? That could have a huge impact on the state of your finances and the amount of money you have at your disposal. But your lender is unlikely to ask about those future plans, relying on your ability to maintain your original debt-and-income picture throughout the home-buying process (and after it closes too). Lenders are required to look only at past financial decisions and current financial health. They want to know you will continue to pay your mortgage into the future, but they can’t predict if life events will render a home unaffordable. It’s up to you to anticipate those potential changes and make adjustments today to be prepared.
5. You’ll be financially strapped and stressed
Agreeing to an expense that could put your finances on rocky ground impacts more than you might think. In a survey conducted this year by PricewaterhouseCoopers, 52% of participants said they were experiencing financial stress, and 45% reported rising stress levels over the past 12 months — and those numbers are even higher among millennials. A large portion of respondents said this stress has resulted in lost productivity at work, increased health issues, and problems in their personal relationships.
So, what’s the bottom line? Lenders are looking at the numbers, while the bigger picture says much more. Even if you can technically afford a monthly payment doesn’t mean you should agree to it. Instead, take a comprehensive look at your finances and determine what’s right for you. When you are in a financially comfortable home, you’ll be glad you did.
