Mortgage Affordability

When it comes to financing for real estate, the tendency is to think big in relation to the amount you can borrow. In truth, affordability should be a bigger issue.

For the last seven years or so, many people have been borrowing money like mad when it comes to real estate purchases. This is hardly difficult to understand. Money has been cheap. Borrowing requirements have been even slacker. Given these circumstances, people have borrowed amounts they really shouldn't have. The rarely got into problems however, since property was appreciating so fast. If payments became a problem, they could just sell the house and pocket a nice chunk of change.

As you probably know, the real estate market has undergone a rather significant cooling off period. Appreciation is non-existent across much of the nation. Prices are falling. Borrowing money is becoming more expensive. All of this has combined to wipe out more than a few people who have borrowed more than they really should have. If you don't believe me, just look at the increase in foreclosures and defaulted loans.

The increase in foreclosure and defaults raises a key point that many have failed to grasp when it comes to mortgages. The point? What you qualify for and what you can actually afford are often two vary different numbers. The fact that you can qualify for a $500,000 loan does not necessarily mean you should borrow that amount. The qualification amount is determined by a formula, and our lives are not particularly stable enough to live by such formulas.

When borrowing money for a home purchase, the critical question is what you can afford. This best indicator is to make a budget and then figure out what you can handle in relation to a monthly payment. When you start applying for financing, keep that number in mind. If you can afford to pay $1,200 a month, don't borrow any amount that is going to result in a higher payment. This requires discipline on your part, but sticking to your payment number will keep you out of trouble down the line.

In summary, the amount you qualify for and the amount you should borrow are almost always two different numbers. Figure out what you can comfortably afford and stick to it.

Dan Lewis is with Great Western Mortgage - California mortgage brokers providing home loans.