When you get preapproved for a mortgage, your lender will tell you the maximum loan amount you can qualify for. But you might not want to shop for homes at the top of that price range.
As lending expert Ivan Simental recently put it on The Mortgage Reports Podcast, “Don’t buy the most expensive house you can afford.” Doing so can be dangerous, and there are serious risks to be aware of.
Are you considering buying a house soon? Here’s why Simental says you should think twice before maxing out your budget.
The term “house poor” means you essentially put all your money into your new home. This can happen when your monthly mortgage payment is so high that it eats up a large chunk of your income, leaving little room in your budget for other things.
“This is living paycheck to paycheck to afford that beautiful house,” Simental says. “You’re living essentially just to make the payment.”
It’s a lesson he learned the hard way. “When I was younger … I purchased an expensive car and, literally, I was working just to pay for that car,” Simental says. “I couldn’t really go out to eat or hang out with friends because it was very, very stressful and I needed to make sure that I had enough to make that expensive car payment.”
So, just how much should your mortgage be compared to your income?
Experts often recommend following the 28% rule of thumb. That means your total house payment (including loan principal and interest, taxes, and insurance), is no more than 28% of your pre-tax monthly income.
Of course, everyone’s budget will look different. But this can be a good starting point to determine a “comfortable” monthly payment for you.
Taking on a large monthly payment can also hold back other financial goals. You might not have the funds you need to save for retirement, invest, put money toward your children’s college fund, or even just build up an emergency fund.
“You don’t get to save, you don’t get to live life, and you don’t get to really do the things that you enjoy,” Simental says. “It really doesn’t allow you to hit your goals.”
Simental has seen first-time buyers get themselves into just this situation.
“I’ve had clients who really want to push the limit on their purchase price or really want to get or max out what they can afford,” he says. “A year later, they’re like, ‘Man, we wish we would have gone with a lower payment because of X, Y, and Z.”
The “X, Y, Z” could be investing, saving, traveling, going back to school, starting a business — you name it. The point is that you don’t want a house payment so high it prevents you from meeting your other goals and enjoying financial freedom.
Many first-time home buyers plan only for their upfront costs and monthly mortgage payments. But there are countless other costs to account for, too.
You’ll need to cover home insurance, property taxes, and mortgage insurance (if you put less than 20% down). Some buyers have to pay homeowners association (HOA) dues. And you will also need to purchase furniture, cover moving expenses, buy appliances, and more.
“These aren’t cheap,” Simental says. “We just purchased a couch. It was about $3,400 bucks. We also had to buy a new fridge, which was $1,500 bucks. It really does add up at the end of the day.”
Stretching yourself too thin from the get-go could make it harder to afford the other expenses that come with homeownership. Buying a more affordable home, and leaving wiggle room in your budget, will help you enjoy your life as a new homeowner to the fullest.
Finally, there are the inevitable repairs and home maintenance to think about. “There might be some costly repairs that you will need to pay for,” Simental says. “And you can’t do that if you’re maxed out on your preapproved loan amount.”
You might not expect to make repairs right away — especially if you buy a turnkey home — but these things often crop up regardless of how new the house and its features are.
“When we purchased our first house, the AC went out,” Simental says. “That by itself was $8,000 to repair.”
You’ll need savings on hand to cover these types of issues, as well as general home maintenance that you didn’t have to worry about as a renter — things like cleaning the gutters, maintaining a yard, tuning the HVAC systems, and more.
Without the funds to pay for these, you risk running up credit cards and racking up debt. So make sure you’ll have some cushion left in your bank account after the down payment and closing costs have been paid.
If you’re thinking about buying a house, talk to a mortgage professional first. They can help you set a reasonable price range based on your financial goals, monthly budget, and other personal details. Ready to get started?