Are you trying to decide how much you can afford to spend on a home? If this is your first home purchase, you should be aware of the pitfalls involved. Perhaps the best way to describe these is to compare your home buying experience to a more familiar experience: buying a car.
Have you ever walked into a car dealership and been asked by the salesperson what kind of car you were looking for? Of course you have. They probably asked you a more specific question regarding your budget or how much you could afford to spend on a vehicle purchase. How did you respond? Did you really have a good idea of how much you could afford to spend on a car?
Unfortunately, most people don’t have a good idea of what their budget is when they go shopping for a car. They don’t plan to pay for the vehicle in cash, so they let the lender decide how much they should spend. The problem with this process is that no one understands your current financial situation as well as you do. You may think the lender is qualified to determine how much you can afford to spend, but the truth is the bank is only interested in getting its monthly payment from you. Obviously, your income and credit history will be considered in order to minimize the risk of default, but no one really cares if you are strapped financially as a result of the new car loan. As long as you continue to make the payments each month, everyone is happy (except maybe you and your family).
The consequences of taking on more than you can afford are greatly magnified when you purchase a home, since you are obviously making a much bigger commitment in terms of money and the amount of years it will take you to pay off the loan. It should go without saying that this requires more careful research as well as evaluation of your finances, but far too many people jump into a home purchase out of excitement.
Before you make a commitment, you have to look at your finances carefully and understand how adding a mortgage payment to your monthly bills will affect you. How tight would your finances be if you added this mortgage payment? Ultimately, only you can decide what you should be spending on a new home purchase. If you feel you really would be cutting it close month by month, then you should probably focus on finding a more affordable residence.
You should never take on a mortgage loan that gives you legitimate concern. I’m not referring to paranoia about all the bad things that can happen to your life that could cause you to fail on your mortgage payment. Instead, I’m referring to that feeling you get when you know you shouldn’t be embarking on such a big financial commitment, even though you are being pressured by your own family, real estate agents, or your friends who can already afford to live a little more luxuriously.
Be smart when making these kinds of decisions and listen to your financial gut instead of letting yourself be pressured into a home you cannot afford.