In my last article, we talked about why it's worth getting preapproved before you start house hunting. Once that preapproval letter is in hand, buyers often assume the number on it is the number they should spend. It's a natural assumption, but it's one worth slowing down on.
A lender's maximum approval and a comfortable monthly housing budget are two different numbers, calculated two different ways, for two different purposes.
Two Different Questions
A lender is answering the question, "What is this borrower qualified to repay?" You should be answering a different question: "What can I spend on housing each month and still live the way I want to live?" Those two questions don't always land on the same number.
| What the Lender's Number Reflects | What Your Number Should Reflect |
|---|---|
| Your income, credit, and existing debts on paper | Your actual day-to-day spending habits |
| A debt-to-income ratio ceiling set by the loan program | Money you also want to put toward savings, retirement, or other goals |
| Documented, recurring debts only | Groceries, childcare, subscriptions, and other costs that don't show up on a credit report |
| The maximum the lender is willing to risk lending you | The amount you're comfortable committing to for the next several years |
1 Debt-to-Income Ratios Don't See Your Whole Budget
Lenders calculate how much you qualify for largely using your debt-to-income ratio, your monthly debt payments divided by your gross monthly income. That calculation includes things like car payments, student loans, credit card minimums, and the new housing payment.
It does not include groceries, gas, childcare, subscriptions, entertainment, or how much you're used to setting aside in savings each month. Two buyers with identical incomes and identical approval amounts can have very different amounts of actual breathing room, depending on what the DTI calculation simply never asked about.
2 Your Approval Doesn't Know Your Goals
A lender's calculation has no idea whether you're also trying to build an emergency fund, save for a child's education, pay down other debt faster, or keep room in your budget to travel or invest.
Worth asking yourself: if my monthly payment were at the top of what I was approved for, what would I have to give up or stop doing to make that payment every month?
3 Homeownership Has Costs Beyond the Mortgage Payment
Your approval amount is based on principal, interest, taxes, and insurance. It does not account for the other costs that come with owning a home, including:
- Routine maintenance and repairs
- Utilities, which are often higher than renting
- Lawn care, snow removal, or pest control
- Furnishing or updating the home over time
- An emergency fund for the unexpected, a failed water heater or a roof repair
A general rule of thumb is to budget 1% to 2% of the home's value annually for maintenance, though this varies with the age and condition of the home.
4 A Payment Can Be "Approved" and Still Feel Tight
Loan programs are generally allowed to approve debt-to-income ratios well above what many financial advisors would consider comfortable. A payment can be fully within a lender's guidelines and still leave a household feeling stretched every month.
Being "approved" for a payment is not the same as that payment being a good fit for your life. Only you know what tradeoffs you're willing to make to carry it.
Building Your Own Number
Rather than starting with the lender's maximum and working backward, consider starting with your own budget and working forward:
- Review your actual monthly spending over the last few months, not an estimate
- Decide what you still want to be able to save, invest, or spend on beyond housing
- Subtract that from your take-home pay to find a realistic housing budget
- Ask your lender to show you payment scenarios at a few different price points, not just the maximum
- Factor in a cushion for maintenance, utilities, and the unexpected
Final Thoughts
Your preapproval tells you what a lender is willing to hand you. It doesn't tell you what you should take. The most confident buyers are the ones who walk into their home search already knowing the difference between those two numbers, and who shop within the one they chose for themselves.
If you're working through what a comfortable budget looks like for your situation, I'm happy to walk through it with you and connect you with a lender who will show you real payment scenarios, not just a maximum.
Ready to figure out your number? Contact me for my free First-Time Homebuyer Guide or to talk through your budget and the next steps in your search.
Educational Notice: Loan approval calculations, debt-to-income guidelines, and lending requirements vary by lender and loan program and may change. Buyers should speak directly with a licensed mortgage lender and consider their own financial circumstances before deciding on a homebuying budget. This article is provided for general educational purposes and is not legal, tax, financial, mortgage, or lending advice.