Hosted By: Wyatt Yates
Money Myth: My Lender Will Tell Me How Much Home I Can Afford
In this episode, I discuss how large of a mortgage lenders will approve you for and why they are willing to do so. Is this amount too much? Who should determine what you can afford? What is a good metric to follow when budgeting for housing costs? Listen to find out.
Calculate your current housing costs. Make sure you add in all the costs associated with keeping a roof over your head (mortgage payment, taxes, insurance, HOA fees, utilities, and maintenance). How close are you to having your total housing costs be at or below 25% of your gross pre-tax income?
Wyatt Yates Host 00:00 Money doesn't have to be complicated. You can achieve financial independence. This podcast gets to the truth behind the money mess you hear from your grandma, your broke uncle, the latest social media influencers and the so-called money experts. Welcome to Money Myths with your host, wyatt Yates. The myth we're going to cover today is my lender will tell me how much home I can afford, or you'll hear people say you know, I need to go talk to my lender to see if I can afford this home or if I can get a mortgage for this home. Now, while true, you're going to probably need a mortgage to buy a home, most people need a mortgage to buy a home and you can't buy a home for cash, especially your first home. You may not have the money saved up to buy a home for cash. So there is truth that you need to talk to a lender or a mortgage originator to be able to get approved for a mortgage, to be able to buy your home. I mean, the mortgage industry is $10 trillion in the United States alone. But there's two fundamental flaws in this myth. First flaw is lenders are going to approve you for a mortgage loan bigger than what you can actually afford, so most mortgage lenders will approve you for a 30-year mortgage that has monthly payments of up to 30, 35% of your gross income before taxes, as long as you meet some other criteria. You know they obviously factor in credit score debt to income different stuff like that but the max they're willing to lend you is way more than what you can actually afford. So you can't go off of what the lender says they'll get you a loan for, because if you look at 30, 35% of your gross income before taxes, that's a big number and it's going to eat up a lot of your budget, because that's just your mortgage side. So they'll look at your mortgage and your escrows for that calculation. But you still have other costs associated with housing, utilities and maintenance and whatnot. So why do mortgage lenders do this? Well, they know that you're going to sacrifice just about everything else in order to not lose the roof over your head. Even in the financial crisis of 2008, 2009, where, all over the news, you heard about mortgage loan defaults, those default rates were still way less than other types of debts. So if you take out a mortgage that the max lender is going to give you and you add in all your other housing costs HOA fees, taxes, insurance, utilities, maintenance you're going to end up house poor. You won't have any money left over to invest and pay yourself, and it's going to cause a lot of strain on your finances. So that's the first thing Mortgage lenders will approve you for way more than what you can actually afford. 03:07 The second problem with this myth is you need to take personal responsibility for your finances. It's called personal finance for a reason it's personal. You have to take personal responsibility for it. If you leave your personal finances up to someone else, you lose control, and when you lose control, you're going to be doomed for failure. It's that simple. 03:31 So I just want to summarize this again for you and then get into what I recommend as far as your max on what you should spend on housing. So if you're like the majority of homeowners in the United States, you're going to need a mortgage in order to purchase a home, but if you blindly follow what the mortgage company is willing to approve you for, you're going to end up house poor and unable to meet your financial goals. You have to take responsibility for your finances. It gives you the power to you, not other people. You have the power to change the outcome when you take personal responsibility for your finances and you aren't reliant on someone else. So your goal with your housing costs should be to keep them as low as possible so you have money to invest and pay yourself. I like to say, try to shoot for your total housing cost to be at or below 25% of your gross pre-tax monthly income. So and I'm calculating all housing costs in this and the lower you can get this percentage, the better, because that's going to give you more money to pay yourself and generate that passive income. 04:42 So, in terms of your housing costs, what we're looking at here is everything to put a roof over your head. So it's a mortgage payment if you have a mortgage, it's your HOA fees, it's taxes, insurance, utilities and a buffer for maintenance. So when I look at maintenance costs for your home, I like to use a good rule of thumb of anywhere from 1 to 3% of your home's value. The newer the home or the heating and cooling units, or the roof age, all of that stuff needs to go into account. In the newer it is, the closer to that 1% of your home's value you can budget for and have that buffer. The older stuff is, the older the home, the roof, the heating and cooling units all of that stuff you're going to be closer to that 3% of your home's value and if you use that as kind of your budget for what you expect for maintenance to be on your home, so you add up all those costs and you want them to be less than 25% of your gross income before taxes and your ultimate goal should be to pay off your mortgage before you retire. The sooner that you can pay it off, the better, because you can reduce a big factor in most people's budgets and that gives you more money to invest and build wealth. So by having that mortgage paid off by the time you retire, you're really fixing your housing costs. You're just having taxes and insurance, maybe some HOA fees or your maintenance costs. If you can pay it off before retirement, the better. I really like you to try to get aggressive on paying off your mortgage, because it's going to really empower what you can do with your money and give you a lot more money to throw at investing and building wealth. 06:43 Now for the action steps. This week I just want you to go through and calculate your current housing costs. Make sure you add them all up your mortgage payment, your taxes and insurance, hoa fees, utilities and use that 1% to 3% of your home's value to estimate maintenance. Then add them all up, come up to a monthly figure and then compare that to your gross income. Are you at or below 25% of your gross income for your housing costs? 07:14 If you're above 25%, what can you do to lower it? Don't freak out. If you're at 30% or 35%, it doesn't mean you have to go sell the house tomorrow. It just means you got to get a little more creative and cut in other areas and try to figure out how you can get that housing cost down to 25% or less. 07:35 What can you do? How can you increase your income? How can you pay off your mortgage? Come up with a plan to pay off your mortgage because obviously, once you pay off your mortgage, you're probably going to be under that 25%. Now, if you're currently at or below 25%, when you add this up, try to devise a plan on how can you pay off your mortgage early. Can you get it paid off in 10 years? Most people can. I really push you to try to figure out how you can pay off that mortgage early, because it's going to free up a lot of the time and it's going to feel better not having that mortgage payment. Add up all your housing costs and compare that to your monthly income, and where are you in relation to that 25% rule? Thanks for listening and, lastly, please take a screenshot of the episode, share it on your social media channels and tag us using at Rugged Financial. We will see you later.