Balancing What the Bank Says You Can Afford and What You Can Really Afford

By
Services for Real Estate Pros with Think Glink Media

When determining how much to spend on a home, your bank may have a different idea about your budget than you.

balancing what the bank says you can afford and what you can actually afford

A mortgage lender might approve you for one amount, based on a conventional debt-to-income ratio, while you'll get more money if you go for an FHA loan with higher DTI limits or for an FHA 203K loan, which qualifies you for up to 125 percent of the sales price if work needs to be done to bring the property up to code.

At the same time, it might be that none of those amounts is what you're comfortable spending each month on your mortgage payment, real estate property taxes, and homeowner's insurance premium.

Homebuyers often forget that buying a home means you take on not only monthly mortgage, tax, and insurance payments, but also assessments (for a condo or co-op) and ongoing maintenance costs, which can add up.

Figuring out how much you can afford to spend on a house means thinking about your lifestyle and your debts, not just what the bank says you can afford.

 

To find out more about how to determine what you can really spend on a home, check out my blog post on the Equifax Personal Finance blog: http://real-estate.equifax.com/2010/11/balancing-what-bank-says-you-can-afford.html

What is your strategy for figuring out a budget for buying a home?

 

 

 

Ilyce Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com, The Equifax Personal Finance Blogand CBS Moneywatch She is Chief Content Strategist at RealtyJoin.com, a community for real estate investor

 

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Re-Bloggged 3 times:

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  1. Stephanie McCarty 11/30/2010 11:09 AM
  2. Michael Jacobs 11/30/2010 04:05 PM
  3. Dawn Maloney 12/14/2010 02:47 PM
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Ambassador
407,830
Tammy Emineth
Content Marketer, SEO Teacher, Website Fixer
Personal SEO - Website SEO and Real Estate Marketing

excellent points. I try to get my buyers to look at homes about $10,000 under their max if they can. Most first time buyers are like a kid with a credit card and think the max IS how much they GET to spend.

November 29, 2010 11:11 PM
Rainmaker
617,382
Deborah Byron Leffler BzyBee Real Estate Lady!
Keller Williams Realty Boise

Oh isn't that the truth!   Many of my clients don't want to go to the maximum that they can afford! 

November 29, 2010 11:11 PM
Rainmaker
432,268
Stanley Stepak
Realtor - Avon Lake, Avon, Bay Village, Westlake,
Howard Hanna Gold- Avon Lake, OH

And that is a well shared honest opinion  ilyce is right.  don't get in over your head because you want something beyond your limits.  You need to consider the potential of those homes you can afford or hold off till your in a better position (though the second choice could cost you if the market changes)

November 29, 2010 11:13 PM
Rainmaker
871,885
P.J. Virgilio Jr., Realtor 408-568-6578 Selling homes in the Greater San Jose area and South through San Martin, Gilroy
San Juan Bautista and Hollister as well!
Keller Williams Realty Silicon Valley

Ilyce,

Great info and still another facet of our job to inform our clients in their journey!

November 29, 2010 11:15 PM
Rainmaker
483,864
Jordon Wheeler
J W Group Real Estate Sales and Service
The Jordon Wheeler Group

Good solid advice for buyers!  Thanks!

November 29, 2010 11:15 PM
Rainmaker
229,137
Brad Rachielles
REALTOR, CDPE, Upland, CA
CENTURY 21 Prestige Properties, Ca BRE# 01489453

Ilyce,

Thanks for this down to earth look at finance. It's a concern that so many really don't know what they are doing when it comes to family finances. some Newlyweds don't have the experience or often maturity to manage five or six digits in a budget. Some folks are getting along by "dumb luck" budgeting and some do very well. When some come to the lender's office and this expert/professional says that they can afford $XXXX every month, who are they to say this expert is wrong. They recognize that they could make changes in spending that would be better for them... and commit to the loan.

One problem is that they don't make those expert prescribed changes or don't live by them once started.

Read your linked post and have subscribed to your AR blog. Good information well presented.

November 30, 2010 11:33 AM
Rainmaker
241,926
Ellie Penaranda
Naples Florida Real Estate - Waterfront & Beach Co
239.776.5077 Downing-Frye Realty

Ilyce, thanks for the good read.  In times like these, this is excellent advice.  I like to see my clients enjoy their new home without financial stress.

November 30, 2010 12:14 PM
Anonymous #8
Anonymous
Anonymous

You know over the years I have worked with 100 of first time home buyers. The trend now with most of the young couples al least the more educated one is to rent because Real Estate in there adult life has not been a solid investment. They have seen their parents struggle with house payments and business sizing. Most of all thy want to be in a 80 ties term "YUPPIES" The goal is a good lifestyle and utmost MOBIL!!!!!!!!!

November 30, 2010 01:05 PM
Ambassador
683,273
Charita Cadenhead
Serving Jefferson and Shelby Counties (Alabama)
Keller Williams Realty

So many times buyers just look at that monthly payment as the deciding factor when there is so much more to consider.  Not only that, buyers have a tendency to want to purchase at the max that the lender say they will lend (which is not always a good idea particular if the buyers are first time homebuyers).  That may be the frugality in me, but I don't ever want to max myself out and I wouldn't advise others to do it either.

November 30, 2010 01:15 PM
Rainmaker
401,965
Claudette Millette
Buyer, Broker - Metrowest Mass
The Buyers' Counsel

Of course this isn't as bad as it was during the peak.  Banks would push people out to buy much more than they should have been doing.  But, it still holds true that the person buying the home should decide on what they are comfortable with for a monthly payment, not the bank.

 

November 30, 2010 01:24 PM
Rainmaker
324,865
Doug Reynolds
Realtor - Sacramento, CA
Better Homes & Gardens Real Estate

I am always happy to hear from buyer clients that say..."i'm qualified for 250 but i want my payments to be around a 200k purchase price.  those are the responsible buyers.  it makes me nervous when we are right up against the buying limit.

November 30, 2010 04:55 PM
Rainer
92,639
Richard Sanderson
Property Tax Consultant
Local Government Services International

I have owned five homes, with the first one having been purchased in 1976.  I've always made it a rule to determine how much home I can afford after looking at my own budget and lifestyle.  As such I have always considered what lenders and real estate agents have told me as guidelines.   

November 30, 2010 05:33 PM
Rainmaker
247,383
Steven Beam
Parker Colorado Real Estate
RE/MAX Alliance - Parker Colorado Real Estate.

I always tell buyers to work it backwards from what they can really afford to comfortably pay per month then figure out what price home that equals. 25-30% of you NET take home income is pretty much all your house payment should be. It makes for fun living.

November 30, 2010 06:35 PM
Rainmaker
973,701
Sharon Alters
Your Fleming Island Relocation Agents.
Coldwell Banker Vanguard Realty

Ilyce, our buyers rarely buy what the bank says they can afford and they are well aware of the HOA and other community fees that go along with their homeownership. Excellent post on this topic.

November 30, 2010 07:28 PM
Rainmaker
1,508,959
John Novak
Henderson, Las Vegas and Summerlin Real Estate
Keller Williams Realty The Marketplace

New homeowners need to exercise financial discipline. It can be tempting to buy a lot of new things for the home (or a new car to decorate the driveway), but consumer debt can quickly put them in a perilous position.

November 30, 2010 08:05 PM
Rainmaker
506,395
Patricia Aulson
Realtor - Portsmouth NH Homes-Hampton NH Homes
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate

Smart buyers don't want to spend the max of what "the bank " says they can afford. They'll look at those homes that "they know they can afford"  I'm always impressed with these smart people.  The banks and lending institutions were telling people they could afford more than what they really could afford.  That's part of why we are all in this lousy economy today.

Patricia/Seacoast NH & ME

November 30, 2010 09:04 PM
Rainmaker
558,659
Chris Olsen
Broker Owner Cleveland Ohio Real Estate
Olsen Ziegler Realty

Hi Ilyce -- I really try to counsel first-time home buyers to really know their income and expenses in great detail, using a spreadsheet or some other program and track where their money goes, and to really budget, know that there may be an additional 1-2% of the purchase price in maintenance costs per year, budgeting for replacement reserves of major systems, etc. As well as budgeting for change in lifestyle, potential relocation, job loss, school, retirement, etc., and to live under their means so they aren't stressed.  It's a sobering conversation but an important one.

November 30, 2010 09:56 PM
Rainmaker
215,101
Bernadine Hunter, SFR, ACRE
"Finding Solution to Your Real Estate Needs"
Keller Williams Greater Columbus Realty

I also caution buyers to buy below what the bank says they can affort and try to only show them houses that fit that criteria.

December 01, 2010 07:41 AM
Rainmaker
362,682
Ilyce Glink
Best-selling author, award-winning TV/radio host.
Think Glink Media

Thank you all for your comments. I think planning a budget before looking at houses (and sticking to the budget!) is one of the most important things a buyer can do. 

 

As we all see from the mess of the housing industry right now, the size of the loan the bank is willing to give you is not always the size of loan your budget can afford.

 

Thanks for reading, and please visit and share the full blog on the Equifax Personal Finance Blog

December 01, 2010 05:52 PM
Rainmaker
574,918
Valerie Zinger
Home Organizer
House Proud Ottawa-Ontario-Canada

Ilyce:  This is an nice short post with a very strong message.  Affordability is not just the mortgage payment.  Home or condo  ownership has all kinds of other costs that you don't have at mom's or at the all included rental.  Thanks. 

December 02, 2010 05:03 PM
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Rainmaker
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Ilyce Glink

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