#42 - Home Budget
One of the first tasks many prospective home buyers do is getting prequalified for a mortgage. This essentially entails giving a lender some basic information and the lender giving back an estimate of how much they would be willing to lend. Unfortunately, this estimate is often quite a bit higher than what makes sense for a buyer to purchase. There are several different variables that go into prequalification, but for a couple with good credit and $150,000 of full-time W2 income, an estimated prequalification number according to NerdWallet's calculator (see variables and disclosures) is about $750,000. Should this couple purchase a $750,000 home though? In almost all cases, the answer is no and likely nowhere even near that high (or as high as NerdWallet indicates). You should not base your home budget on the prequalification or preapproval amount. If you do, you could end up having to adjust your life around your mortgage payment. Why would you want your mortgage to determine if you can stay home with your kids or start your own business? How should you determine your home budget? It takes a careful and intentional analysis of your goals. Does a nicer home and higher mortgage help or hurt your pursuit of those goals? Below are a few examples of some goals that could be impacted by having a higher mortgage:
The ability to stay home with children.
Starting a business.
Giving 20-30% of income.
Paying for children’s college.
The bank does not take into account your goals when determining how much they will lend you. They typically profit more by you taking a larger mortgage. Be intentional when purchasing a home. Determine your home budget after prayerful consideration.
Interesting Article(s) or Video(s)
Eternal Perspective Ministries - Ten Biblical Reasons to Give, and an Opportunity to Serve Needy Children through Compassion’s Fill the Stadium
I always love reading Randy Alcorn’s thoughts on the intersection of faith and finance. This is a great list of reasons to give.
New York Times - How the Virus Transformed the Way Americans Spend Their Money
This article is a brief snapshot of consumer spending right at the start of the pandemic.
Thank you for reading! For those of you that are homeowners, did the amount of the lender's prequalification change the amount you were planning to spend on a home?