What You Qualify For vs. What You Can Afford

If you’ve never gone through the home loan process, the experience can be a bit daunting; however, with a little financial guidance, you can easily get the ball rolling. You want to be able to build a home with confidence and know what you can comfortably afford before you buy. 

The trouble many buyers face is they qualify for more money to borrow than what they should actually spend, based on their monthly expenses. Just because you’re approved for a large amount of money doesn’t mean you should actually use that amount of money. You’ll need a sound understanding of your personal finances and obligations to get a better idea of what you can afford.  

There are ways to avoid frustration over affordability if you decide on a floorplan first. If you get that out of the way, you won’t accidentally choose or be shown something where your mortgage payment could stretch you too far. If you’re informed and upfront about your limits and budget, you won’t have room to fall in love with something you can’t have. 

With that, here are the two main questions to ask yourself  when qualifying for a home loan.

1. How Much do I Qualify for in a Home Loan?

Remember, what you qualify for is not the goal to aspire to, because that might result in overspending. The more appropriate question to ask is, “How much house can I afford?”, since the answer requires you to look into your spending habits and potential wiggle room in your budget that can go toward your home. 

There are tons of online calculators that can find an estimated range of what you can afford, but if you go this route, be sure it’s a reputable source to get an accurate assessment. These online tools can help if you need the estimate in a pinch. 

It is best to start backward to determine what your budget can support. A person can qualify with their total debt being 55% of their gross income. Meaning, if you make $4000 a month, $2200 of that could be going to other debts, such as car payments, credit cards, or anything else. So you may qualify for a certain amount of money, but you must determine what amount will work into your budget with other expenses you already have.

2. What Does My Monthly Budget Support?

The better approach is to calculate your monthly budget first, including current debts or other monthly expenses, then you will be able to see how much of a mortgage payment you can realistically afford within that budget. By this, we mean that you should keep a record of your expenses for a few months before you’re ready to start the search. Then, you’ll see if there’s excess spending (or saving) in certain areas, like groceries, gas, bills, etc. With a home loan, your monthly living expenses are bound to go up. It’s all about determining what’s doable and what isn’t. 

For example, if you currently pay $1100 in rent, but feel you could do a new house payment of $1400, have a loan officer help break down that total payment to help determine the cost of floor plans to look for. There are certain items to consider that make up a total payment, including property taxes, mortgage insurance, and homeowner’s insurance in addition to principal and interest.

5 Other Things to Keep in Mind When Working Towards a Home Loan

There are a few quick tips and things to keep in mind when you’re preparing to finance a home that you might not be aware of if you’re a first-time homebuyer: 

• • • • Pay your bills on time. 
        • Your credit history is a big factor that lenders take into account when figuring out how much of a loan they can approve you for. 
      • Avoid changing employment willy nilly. 
        • You’ll be asked to share two years of your employment history, and stability is key when it comes to a home loan. You may have to share additional work history or income information, but it depends on your situation and your lender. 
      • Do your due diligence. 
        • If you have a good idea of what to expect, you won’t be blindsided by facts and numbers when it comes to signing the paperwork. Generally, know the basic home loan offerings, such as fixed-rate, adjustable-rate, FHA, or VA loans. Once you’ve done your research, you’ll know the right questions to ask your lender, as well as the right things to look for in your contract details. 
      • Avoid opening new accounts.
        • This applies especially when you’re in the process of finalizing and closing your loan. The terms & conditions of most loans have information regarding additional debt as it pertains to credit accounts and credit lines, and taking on too much debt could impact the loan amount you qualify for or the loan that you have in progress. 
      • Avoid closing existing accounts.

Even if you don’t use an account often (say, it’s a store card), closing an account will affect your credit score in a number of ways. Specifically, your utilization will skyrocket since you have fewer accounts. 

3. Talk to a Mortgage Professional

It’s important to talk to a mortgage professional to get pre-qualified, discuss your options, and evaluate your individual situation. Our mortgage experts aren’t there to milk you dry or exploit you in any way. They are seasoned resources on all things mortgages; from the rules and requirements to the pros and cons. They will help you determine how much house you can afford based on that monthly payment and what your potential loan amount could be. Doing this upfront will make the design process fun and you’ll be able to select a floor plan that fits your budget as well as any awesome upgrades you want in your new EDGE Home.

4. Get Started

If you’re serious about buying a home, start with one small step today. For instance, fill out an application to see what you can qualify for! That will get you on the right path to understanding your financial journey towards purchasing a home. You’re already on your way!