Buying a House: How Much Can You Afford?
In 2008, MaKenna Grae* and her husband prequalified for a $2 million mortgage. The couple was stunned. They had never expected to buy a home with a seven-figure price tag.
So, rather than heed the bank’s advice, the Graes sat down and figured out how much they could comfortably pay every month. Before they looked at their first house, they had settled on a budget that had nothing to do with the bank’s recommendation. Instead of shopping for $2 million sprawling mansions, the couple set out to find a home for about $500,000 in northern New Jersey.
“I cannot imagine what our stress level would be or how crazy our lives would be if we had listened to the banks about what we were approved for and bought a $2 million home,” says Grae, who ultimately bought a four-bedroom house for about $425,000 in Elmwood Park, New Jersey.
A Real Estate Rule of Thumb
When the housing bubble burst and it became clear that lenders were handing out mortgages with their eyes closed, many banks tightened their lending practices. Buyers suddenly were being asked to show stellar credit ratings and lay out 20% of the price of the home as a down payment. But, five years later, as the housing market heats back up again, some banks are loosening the reins and once again offering buyers sweeter deals. For buyers who were shut out of the mortgage business for the past five years, the ability to buy is suddenly real again. But, just because a bank thinks you can afford a multimillion-dollar house doesn’t mean it’s a wise financial choice.
“Remember, the bank is in the business of making loans, and they want you to borrow as much as they are comfortable risking on you—and not a penny less,” says Ellen Derrick, a Certified Financial Planner™ with LearnVest Planning Services.