Can I Afford a Mortgage?
Congratulations – your home loan application has been approved!
These life-changing words are the hope of many would-be homebuyers. Qualifying for a home mortgage can seem like the biggest hurdle to homeownership. But a mortgage loan approval doesn’t mean you can actually afford your dream home. When mortgage lenders approve an application, specific lifestyle expenses are not factored into the decision.
For example, Sue Spender and Penny Saver live in Average City, USA. They have the same credit score, household income, and debt-to-income (DTI) ratio. They also qualify for the same $250,000 mortgage loan. However, Penny Saver can afford the mortgage while Sue Spender will have a tough time keeping up with payments after closing.
Let’s find out why.
Sue Spender loves living life on the edge. This also means using all of her disposable income on her favorite pastime, skydiving. While she doesn’t have to give up her favorite extreme sport to purchase her dream home, she’ll struggle financially if she doesn’t change her spending habits. Each jump costs $300 and Sue jumps every weekend.
She plans on increasing her retirement savings, buying a new sports car, and setting money aside for emergencies, but that’s after she closes on her new home. The home’s utility costs and pool maintenance expenses are also more than she’d budgeted. A thorough review of her finances indicates she won’t be able to keep up her jumping schedule if she hopes to achieve her other financial goals.
Penny Saver learned early in life she had to be intentional with her finances. After making several poor money decisions after college, she took steps to improve her credit, build an emergency savings fund, and live within her means.
Before closing on her new home, Penny calculated how a mortgage payment would affect the amount of disposable income she’d have left over each month to enjoy life and save for the future. Despite closing on her new home a few months ago, she still has enough savings to attend her best friend’s destination wedding.
Look to your monthly budget, lifestyle, and financial goals to decide if buying a home makes financial sense. If you’re concerned you might have more in common with Sue Spender than Penny Saver, you can improve mortgage affordability by taking these actions before submitting your loan application:
Improve Your Credit
A high credit score can help secure a mortgage loan with the lowest interest rate and best terms. Low-interest rates translate to lower monthly payments, leaving more room in your budget for other expenses. Before applying for a mortgage loan, request copies of your credit history report from AnnualCreditReport.com and review it for accuracy. Dispute errors and continue to pay bills on time.
The less debt you have, the greater your financial freedom. Reducing debt can even help you qualify for certain mortgage loan programs. But paying off credit cards and loans only to max them out after you move into your new home can put the squeeze on your budget. Set limits on future borrowing.
Open a Home Maintenance Savings Account
A designated account that has funds to pay for routine maintenance and home repairs can shield your monthly budget from the inevitable costs of homeownership. When you have money set aside, you can cover these expenses without stressing your monthly budget. Experts recommend saving at least 1% of the home’s purchase price in a separate account.
Buying a home is exciting, but figuring out financing can be stressful. ENB offers First-Time Homebuyer and Experienced Homebuyer mortgages to meet your specific needs. Email or call us at (877) 773-6605 now to discuss your options.