It’s a familiar story: The inkling for a new home begins to set in, the online search begins and budgeting comes closely behind. As the numbers fall into place and the search is moved away from the computer, many homebuyers fall victim to “dream home euphoria,” a state of mind where The Home has been found. Regardless of price or financial situations, The Home is held on a pedestal, rudely nudging the best budgeting techniques out of the way.
Choirs of “it’s perfect!” and “I wouldn’t want anything else!” echo as you try to rationalize pushing your budget beyond its comfort zone to accommodate the higher price tag.
When the rationalization and justification and excuses and exceptions come into the conversation, it’s time to pause. In complete sincerity: Stop and step back.
If the home’s price tag is not ideal, the home is not ideal. Erase the “but it’s perfect!” rhetoric from the conversation.
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The Approval, Your Budget And ‘Buyers Euphoria’
When you apply for a mortgage, the approval rate sets your maximum, not your target price. The approval number is determined by the lender as the upward limit of your payment capabilities, based on your credit report and other personal data. Regardless of how inclusive and extensive the process is, there is no way to predict with 100% accuracy what your budget can handle over the course of a loan.
Because of this, many loan seekers find themselves on the receiving end of an approval that is beyond their budget’s realistic capabilities. Whether that’s due to circumstances not weighted as highly in credit reports or changing circumstances after purchase (think rising interest rates), as you inch closer to your maximum approval amount, the risk of your investment becomes greater.
The Thin Grey Line
But, what happens if your budget is sound, your financial future is sound, your credit is solid (but may not be as robust as it could be and you’re working on that), and then you find The House?
Quizzle spoke with Dr. Robert Weagley, PhD, CFP®, Associate Professor and Program
Director of Personal Financial Planning University of Missouri about that situation.
Question: What do homebuyers need to keep in mind when they are approved for a loan amount that is higher than they were anticipating/higher than their initial budgeted amount?
Dr. Weagley: I would talk with the family to see what other financial goals exist and if there is a plan in place that is sufficient to fund them. If they are intact, then a larger, more expensive home could be acceptable. If not, they need to understand what they are giving up, if they buy the house that is outside their budget for their goals.
Need help deciding which home buying option is right for you? Check out Quizzle’s Mortgage Resources.
Q: As a follow up, what considerations should be made when looking at a home with an asking price at or above your loan approval amount?
Weagley: A lot of this depends on their down payment. If the home is priced at their loan amount and they plan a 10-20% down payment, the loan would be less than the approval amount. This would generally be good. If the home is 100% financed and they have $0 in equity, we’d need to go back to the answer to question number one and take about their complete set of goals.
Take Weagley’s words to heart when considering your dream home and remember: There are many fish in the proverbial sea of homes. If you have to strain your finances to make the purchase, it may be worth it to consider other options.