When it comes to buying your first home or moving up the ladder to a higher priced home, affordability should be your most crucial focus. Most home buyers don’t tend to concern themselves with affordability; they are concerned with the highest price they can qualify for. Are home buyers truly at fault for this loss of focus? Partially, but not entirely – here’s why:
How you are qualified
There are many factors involved in regards to qualifying for a mortgage, but the one related to your affordability is how well you can handle your debt load. The qualification formula considers your income as a function of your debt, namely mortgage payment, property taxes, heat, and other debt. The “other debt” only includes items on your credit score such as Credit Cards and Lines of Credit, but does not consider other significant expenses such as gas and insurance on your car, your cell phone bill, or any other expenses each individual may have.
How your Realtor is made aware of your price range
If you provide a pre-approval to your Realtor that indicates that you ‘Qualify’ for a Max Purchase Price of $400,000, your realtor has every reason to believe that you can comfortably afford a purchase price of $400,000. Therefore, your realtor will search for homes that meet your requirements and are priced up to $400,000.
How your Realtor is paid
It is no secret that a Realtor gets paid on the purchase price of the house. That being said, the higher the purchase price, the greater the commission they make.
How your mortgage broker / agent is paid
Mortgage brokers and agents are paid a commission on the mortgage amount from the bank or lender – the bigger the mortgage, the more money in their pocket.
How your bank makes their money
Simply stated, the bigger the mortgage, the more money the bank makes in accumulated interest. From a numbers perspective, it is in the interest of the bank to approve you for as much as possible as it generates them the most profits.
So, how can you ensure your purchase a property that YOU can afford?
You need to work with a team of professionals that are long-term focused and genuinely keep YOUR interest as their prime concern. An experienced mortgage broker / agent can help you identify the additional expenses you should consider, and a financial advisor can help you pinpoint your most affordable monthly payment. Once an affordable monthly payment is identified, your mortgage broker / agent can provide you with a pre-approval for the amount you can afford, from which your Realtor will be made aware of your maximum “affordable” purchase price, not just what you qualify for.