How to Avoid Taking on More Mortgage Than You Can Afford

Buying a home can be one of the most exciting things you'll undertake in a lifetime. The process can also feel overwhelming, and lead to a tough financial position if you take on more mortgage than you can afford. It is crucial for woman home buyers, whether purchasing a home on their own or with a spouse, partner, or other co-borrower, to understand just what the financial commitment entails.

Carefully look at your budget before looking at houses.

Don't just add up what you think you spend each month, look at your actual spending over two to three months. Pull out your bank account and credit card statements and look at where every penny went. Factor in any expenses that come up less often such as insurance premiums and holiday spending. Decide how much you want to allocate to short term and long term savings. With these numbers you should be able to determine how much you can spend on your home each month. Come up with this target number before looking at listings, and then consider homes in that price range.

Avoid the mistake of many home buyers who start by checking out available homes. You run the risk of falling in love with a property that is beyond your means, and then taking an unrealistic approach to your budget. When the excitement of the new home wears off you may find you aren't happy with having to eliminate much of your grocery, entertainment, and shopping spending in order to afford your monthly mortgage payments.

It's important to understand that what you can afford and what a mortgage lender will approve you to borrow are often very different things. The mortgage company will verify that you can make your mortgage and other debt payments, but it's not their job to make sure there's enough left over for your groceries, savings, gas, gym membership, and all your other expenses. Only you can decide what you can comfortably afford to spend on a new home.

Take all expenses into account.

When calculating the amount you can afford to spend on your new home you'll need to factor in more than just your mortgage payment. In addition to the principal and interest portion of your mortgage you'll also be responsible for monthly payments to your escrow account. (This is money collected by your mortgage company as part of your monthly payment and is used to pay your homeowners insurance and property tax bills when they are due.) You may also find that the price of utilities goes up if you are moving into a larger home, and that you pay more for gas if you move farther from work, school, or other places you go often. Plan to spend 1 - 2% of the value of your home on maintenance; more if you suspect the roof, siding, appliances, or any of the home's systems are close to needing major repair or replacement. If your neighborhood is part of a property owners association you may also be required to pay annual dues.

Shop around for a good mortgage rate.

Many homeowners simply call the mortgage representative recommended by their real estate agent and take the rate they are quoted. The cost of home financing can vary greatly from one company to another, and you could see substantial savings by shopping around. Compare rates online at a website such as ForTheBestRate.com or BankRate.com, where competing mortgage banks, brokers, and lenders post their current advertised mortgage rates. Talk to several different mortgage representatives and ask each for a Good Faith Estimate so you can compare quotes side by side. Remember that interest rates can change at any time so try to gather the quotes around the same time. That way you know you know how the different offers stack up next to each other; otherwise the price differences could be due to market fluctuations.

Choose a mortgage program that is a good fit for your scenario.

A great way to end up with a mortgage you can't afford is to choose the wrong program. The interest savings of a 15 year mortgage might seem very attractive when comparing it to a 30 year loan, plus you'd be mortgage free a decade and a half sooner! But, a 15 year loan is not a wise choice if you can't comfortably afford the larger monthly payment that comes with it. Similarly the low introductory payment of an adjustable rate mortgage could be enticing, but you have to have a sound plan for handling potential rate increases down the road. Talk to your mortgage representative about the different programs you qualify for and the pros and cons of each to find the best fit.

Don't deplete your savings for the down payment and up front expenses.

Be sure that the amount you need to bring to your real estate closing won't drain your bank account. For one, it's important to have an emergency fund in the event of a job loss or large unexpected expense. Second, in order to qualify for your home loan the bank or lender will require that you have a certain amount of money in reserves, often enough to pay your mortgage and other debt payments for three or six months. If maintaining the necessary balance in savings isn't possible after making a large down payment you might want to consider a low money down mortgage program such as an FHA loan.

Try out your new monthly budget.

If your expenses will increase should you spend what you're planning on a new home, live with that new budget while you are house hunting. Set the additional amount to automatically be transferred into savings and see what it's like to manage with what's left. If you find money is too tight you may decide to look at slightly less expensive homes. If the new budget is comfortable you'll go into the purchase more confident and with a little more money saved.