You want to buy a house and feel as though you’re in a good financial position to do so. Your credit score is strong, you have a respectable down payment saved, and you are fortunate enough to have steady employment.
And then a mortgage lender tells you how much you qualify for, and you are thrilled. You have more money to work with than you initially imagined. Before you do anything rash, consider how borrowing every dollar offered could impact your everyday life.
Here are three good reasons not to borrow money simply because it is offered.
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1. You need wiggle room
Many a homeowner has borrowed the maximum, only to find themselves without money for extras. If the loan amount (and mortgage payment) suggested by your bank is steep enough to prevent you from doing the things you enjoy, consider whether it will be worth it to you.
You may be able to call yourself a homeowner, but is it worth giving up hobbies you enjoy, travel, or paying for the perks your children care about, like team sports? If accepting the maximum loan amount means letting go of things that bring joy to your life, it’s okay to recalculate and decide how much your monthly mortgage payment would need to be for you to have the best of both worlds – a home of your own and fun extras.
2. It’s safe to expect the unexpected
People across the globe were shocked by a pandemic that shut down entire industries, killed millions of people, and kept many of us at home for most of 2020. Even if we never experience another pandemic, life can get messy.
Can you make the mortgage payment you’ve qualified for if you or your significant other loses a job? What if one of you gets sick and goes on short-term disability or is temporarily without an income?
If you do accept the full mortgage offered, will you have enough room in your budget to pay for emergency home repairs, such as a leaky roof or flooded basement? What happens if, like one couple featured in the Wall Street Journal, you move into a house only to learn that woodpeckers have caused $150,000 worth of damage?
One of the most tedious parts of being an adult is figuring out the worst-case scenario and deciding if you have a plan to survive. Before accepting a home loan, run through the “maybes.” You may never run into trouble, but if you do, be prepared.
That means figuring out how much house you can afford during periods of unemployment and sickness or when there’s an increase in childcare costs or other unforeseen circumstances.
If your emergency fund is large enough to cover three to six months’ worth of bills, you may feel confident that you can make your mortgage payment each month without fail. If you don’t have anything to fall back on, it’s time to determine how much you’re comfortable borrowing.
3. You’ve got dreams
Do you fantasize about early retirement, traveling the world, or starting your own business? Do your goals include helping your children pay for their education or going back to school yourself?
Do not allow a high mortgage payment to divert you from your dreams for the future. It may mean that you need to set your own borrowing limits. Decide how much you can afford to pay each month and stick to that number. If your mortgage lender says you qualify for more, you’re free to say no.
Here’s the thing about mortgage lenders: They don’t know you personally and are not impacted if you have to give up the things you enjoy or your plans for the future to repay a loan. They set debt-to-income (DTI) ratios because they want to make sure you don’t get too deep in debt. While that sounds great, it’s not for your benefit. It’s so they don’t take a loss if you begin to miss payments you can’t afford.
Look out for you
Despite the current buying frenzy and record-breaking housing prices, the best you can do is play your own game. Don’t get caught up in what you “think” you’re supposed to do. Do what’s right for your situation.
Ask anyone who has purchased several homes during their lifetime about their favorite. Chances are, it was not the largest, fanciest, or most expensive. There’s a very good chance that they will name the house where they remember being happiest. And let’s be honest about this: It’s much easier to be happy in a place if you can easily afford the monthly mortgage payments and upkeep.