It is critical that you know your spending habits. You are going to be dealing with real estate agents, and either lenders or mortgage brokers. They will all have the same goal, to get you a house and financing. The good ones will work very hard to get your offer accepted and get your mortgage loan approved at a fair price. But even the best of them will seldom warn you about possible problems in the future that will cause your loan to become so expensive that you could lose your home. If you do get such a warning, often it will come with the assurance that there is little chance that it could actually happen.
Another thing that they will seldom (if ever) do is go beyond asking for the customary numbers required for a loan. If your income-to-debt ratio is good enough to qualify you for the loan, that is where they will stop. People lose their homes through foreclosure every day. Not all of these losses are caused by job loss, illness, divorce, or death. Many are the result of irresponsible spending or taking on a mortgage that eventually required a higher payment than the borrower could afford. The current housing crisis illustrates this point.
Many people find the result of this examination very positive. They realize that by prioritizing their spending and cutting out or cutting down on some things that are really unimportant, they can afford much more than they originally thought. This could mean the difference between getting a fifteen or twenty-year loan as opposed to a thirty-year loan. The interest rate would be lower and the higher payments going to principal would save tens of thousands of dollars over the life of the loan.
At this point, you should have purchased a copy of your credit report from all three of the major credit bureaus, Equifax, Experian, and TransUnion. As discussed earlier, you can contact these companies directly on the Internet. You can also use a service that will purchase all three reports for you. If you use a service, make sure it is not just a lender or mortgage broker trying to find a way to contact potential customers. You do not want people pressuring you to take a loan from them quite yet.
You will not know what you can really afford to pay until you carefully examine your spending habits.
Incidentally, many people get the wrong loan simply because they cannot say no. If someone calls before you are ready, simply tell the person that you are not ready to discuss a loan yet. If he or she leaves a phone number, you may call him or her at a future date. Ask him or her to please not call again. Whatever you do, do not start answering questions. If someone asks why you are not ready yet, you have to be strong enough to say that you are not going to explain your situation to him or her. If you do not like confrontation, the easy way to avoid this is simply to screen your calls on your answering machine or caller ID. This will cause your phone to ring a lot more since the same people will keep calling, but at least you will not have to talk to them until you decide the time is right.
You have to divide your spending into two categories, things that you must have (necessities) and so-called discretionary spending. Unless you live in a city such as New York, you probably own a car. How long could you keep that car if you were in a financial bind? Is it necessary that you have a relatively new car for business reasons or do you want one only for your enjoyment? If you are making payments, when will they end? If you lease your car, can you roll over the lease and keep the car at a lower monthly payment? Contact your leasing company and find out if you can do this and how much the new payment would be. This is not something that you have to do. It is only something that you could do if needed. The same applies if you have more than one car.
Have you financed anything else, like a big-screen television? Could you pay it off in a short time if needed? If you put the purchase on a credit card and make the minimum payment every month, as a practical matter, you will never pay it off.
Check your phone bill. Do you call your mom across the country and talk for an hour every day? Would she get too upset if you called her every other day? Examine your credit card purchases. Are you paying interest on things that you could have purchased for cash, like a cup of coffee? Fast-food restaurants now allow a customer to swipe a credit card and leave. There is nothing to sign and no identification to show. The amount of money that can be put on the card before you have to sign for your purchases has a current limit of $25, which will most likely increase. They would not do this unless there were a lot of customers using credit cards.
What about the rest of your credit card purchases? Are there several items every month that are impulse buys that you later regret? Are you buying items from television infomercials or the channels that sell things all day? Get some idea of an average month’s spending on the items that you really did not need.
Food can be a huge item. Some people eat dinner in a good restaurant three times a week. With a good (not great) bottle of wine, the cost for two is well over $15,000 a year. That is $1,250 a month, not counting lunches or Sunday breakfasts. Add that amount to a mortgage payment and see how drastically what you can afford changes.
Even things as seemingly minor as a morning cup of coffee and a pastry can add up. If you spend $6 every workday for coffee and a pastry, it comes to over $120 a month. If there are two of you doing this, the $240 a month could be the difference between a thirty-year loan and a twenty-year loan. Coffee and pastries are costing you several thousand dollars a year, in addition to the interest on your mortgage. It all comes down to what you want and your perspective.