You might think a mortgage lender would be able to crunch the numbers and only lend you exactly as much dough as you’ll be able to comfortably pay back—but you’d be wrong. “There’s so much complexity that goes into how much you’re approved for, but there are still many factors that aren’t taken into play,” says Jason van den Brand, co-founder and CEO of mortgage startup Lenda.
Buy a home using every last dollar available to you, and you might be signing up for a 30-year mortgage that you can’t actually afford. That means you might find yourself facing a home sale sooner than you want—or worse, a foreclosure. “As a homebuyer, you have the decision to make of how much money to borrow,” says van den Brand. Here are three reasons why the mortgage available to you might not match how much you can actually afford:
1. THE BANK DOESN’T SEE ALL OF YOUR OBLIGATIONS.
The “three Cs” are the main factors that determine how much a bank thinks you can borrow: your credit (how much debt you have compared to available credit), your collateral (meaning your down payment) and your capacity (or ability to repay, based on things like your income and whether you have a co-buyer).
“But when the lender looks at your debt, it’s really only things that would appear on your credit report, like car loans, student loans, credit cards and child support payments,” says van den Brand. So if you’re shelling out two grand a month for daycare or sending $500 to your aging parents every paycheck or helping cover the cost of your younger sister’s textbooks, “none of that goes into the ratio of what you can afford,” he says.
2. THE BANK DOESN’T KNOW YOUR FUTURE PLANS.
No one has a crystal ball to see what your finances will look like in 30 years, so the bank makes assumptions based on your finances right now. But if you have a five-year plan that could radically impact your income (like, say, starting your own business, switching careers, or becoming a stay-at-home parent), that info won’t get factored into your mortgage size. Ditto if you plan to buy a second car, start or expand your family, or take up some pricey hobby. You’ll want to fold those expenses into your monthly budget before you sign up for a mortgage that could stretch your finances and limit what you can do in the future.
3. THE BANK WON’T CRUNCH YOUR NEW HOME COSTS.
Even if you can comfortably swing your rent each month, don’t assume that you can handle a mortgage payment of the same size. That’s because there are more expenses when you own a home (like property taxes, homeowners insurance, and maintenance costs). “And lenders don’t take into account where you live or the cost of living there,” van den Brand says. Are you commuting farther to work and spending more on transportation? Are you in a new city where everything from groceries to gasoline is more expensive? If your new digs are in a new area, some expenses might be harder to anticipate from afar: Moving from Chicago to the nearby suburbs, for instance, might shave 10 percent off your food bill—but could cost you 7 percent more in healthcare, according to CNN’s cost of living calculator.