When you’re thinking about buying a new home, ask yourself, “How much should I borrow?” instead of, “How much could I borrow?” It’s an important distinction: Rather than focusing on the largest loan amount you could possibly get from a mortgage or home equity line of credit, this approach focuses on the amount that fits your budget.
Should vs. could
Working out a monthly household budget (one that includes any additional expenses that come with homeownership) can help tell you how much you should borrow. After all, you don’t want to stretch your budget to its limit in order to accommodate a loan.
Use our Affordability Snapshot to get a full picture of your pre-tax income, your current debt payments (such as credit cards, student loans and car loans or leases), your savings and how a new or additional loan payment could fit into your financial picture.
Remember to include in your budget all the potential costs of a new home such as utilities and private mortgage insurance. View tips for first-time homebuyers
After you’ve set your budget
Once you’ve factored in all the costs and found the monthly mortgage payment that fits your budget, talk with your lender and have them help you translate that payment into a realistic mortgage, loan or home equity line of credit amount.
When comparing different loans or lines of credit, make sure you clearly understand their terms and would feel comfortable with the monthly payments throughout the life of the loan or line of credit. And if a lender says you can afford more than what you’ve budgeted, seriously consider whether this would be a stretch for you – and don’t hesitate to stick to a smaller amount. If a lender tries to pressure you into accepting a loan or monthly payment you’re not comfortable with, choose a different lender.
You may also want to consider prequalification. While prequalification doesn’t give you a loan commitment or a guarantee, it’s a good first step to see the amount and type of loan a lender could offer you.
Finally, keep in mind how much you can afford to borrow without putting the rest of your financial plans on hold. This can help you build a stronger future, because you’ll be better informed and better equipped to be a successful homeowner.