When my wife and I were starting to consider buying our first house we decided that we should do our own evaluation first to see what we thought we could afford (based on our income and expenses at that time, with future plans in mind)…We had created CalendarBudget at that time for our own use and so we were able to figure this out more easily by looking forward in our budget calendar to see what our maximum monthly balances were showing as affordable. We decided on an amount and then went to the bank to let them know that we would be looking for a mortgage and know what they would pre-approve us for.
They ended up pre-approving us for $20,000+ more than what we thought we could afford. We evaluated what the bank was allowing and saw that at the very extreme we could afford that, but it wouldn’t allow for additional expenses that would come with owning your own house (like maintenance, odds, and ends of things you don’t already own, special occasion expenses, the occasional dinners out, any children we’d have, entertainment, additional furniture, etc). We decided it would be best for us to go with our evaluation so we wouldn’t be stuck if we hit any snares along the way that would then possibly mean us losing the house we’ve worked so hard for.
I’ve also seen another friend’s point of view. They got lured in by what the banks and loans officers were offering. They felt very prestigious with all the money that was being offered to them as loans. They felt the loans must only be being offered to them because they could afford it. They felt they should take all they could get and buy a really nice house. When troubled times came, as they always do at some point, they could not qualify for any more money to help them since their debt service ratio was already maxed out. They entered into 2nd mortgages and other risky loans and had a very hard time — and are still trying to recover from this mistake.
The truth of the matter is, you need to be careful and judge for yourself how much you can handle. Just because a bank is willing to offer you a large loan doesn’t mean you should take it. I’ve asked for reductions on my credit card limits and line of credit in the past to prevent myself from making poor choices when times get tough. There always comes a time to pay the piper. Be careful not to bite off more than you can chew.
I know there are horror stories out there. Take a moment and warn us about some bad decisions you’ve heard about.
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