November 29, 2010

Take Pre-Approved Mortgage With a Grain of Salt

Dream House

Sunday morning, Mister and his tender half, dream of more space. They think of moving out of their tiny apartment. In fact, they hope they can finally afford a cozy house: their first house.

Mister proposes to contact their bank as of the following day; two days later, they suddenly sit in front of the nice mortgage clerk. After some quick questions, some fast typing and several smiles; a sheet is frantically printed in the adjacent room, the verdict is out: $300,000!

Wow! Our young couple is ecstatic, they can stop to dream of a house; they now can afford the house of their dreams! And all this, despite their income…their modest income.   

But their dream will probably transform into a nightmare if they don’t wake up soon. At this moment, they only think of their house; their castle in fact. They don’t think of the financial burden, the high monthly payments of more than $1900 (@ 6% over 25 years) and of all the expenses that come with a big residence.

Trust Your Budget Instead

Although it is an excellent idea to get a pre-approved mortgage from your financial institution, you should not use this amount to determine the house you can afford.

Instead, you should buy a house according to your means and to your own budget. You will be the ones making the payments. The bank won’t make them for you; the smiling mortgage clerk neither.

An Upper Limit

You should rather see your pre-approved mortgage of an upper limit; a limit not to be reached, and even not to be approached.

Bank evaluations are often too general. Nevertheless, it can constitute a good staring point. But remember that banks want to lend you as much as possible. 

Don’t stop dreaming but take the means to realize your dreams and for the moment, be a little more realistic and modest. It’s a better way to get your dream house or at least, to keep it. Your castle could simply be, in a few years, your third house!

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