When considering applying for a mortgage there are two important differences. First, how much do you qualify to borrow? Secondly, how much should you really spend?

Only a lender could tell you how much you will qualify for a mortgage but it doesn’t mean you have to spend the total amount you qualify for. A little wiggle room on your monthly expenses equals to a little peace of mind, that is our model, especially if you are a first-time homebuyer. Plus being house poor is no fun. Budgeting for the occasional night out enjoying family and friends, a mini-vacation and celebrating special days and holidays, feeds the soul.

So what do lenders base their decisions on? They consider credits scores for one. Your credit score and history will provide them with your spending and repayment trends and help them determine if they’d consider you a low, moderate or high-risk customer. Another key factor is your debt-to-income ratio (DTI). The lender calculates this by dividing the total monthly debt expenses like a vehicle loan, your credit card balances and student loan payments — by the gross monthly income. Generally, lenders won’t approve mortgages for people who spend more than 43% of their income on recurring monthly payments. Some conventional lenders will go up to 50%, while government-backed FHA financing will go as high as 55%.

So how much should you really spend? We suggest you add the cost of your new mortgage to your monthly recurring expenses and bills and include the estimated costs of your monthly utilities, home maintenance, groceries, gasoline, viecle maintenance, clothing, school supplies and all those other things you spend money on, month in and month out — items your lender doesn’t pay any attention to when calculating your DTI. This will ensure that you are planning and the amount your borrow makes financial sense. Make sure you include everything, from your cable and internet bills to your cellphone. And allow amounts for entertainment, transportation, and an emergency safety net. Planning your budget will take some time, but it will be well worth it to determine your own financial commitment and lifestyle.

If you are considering your options with buying or selling your home contact us at 306-809-7650 for professional guidance and representation.