Is your mortgage approval always what you can afford?

Is your mortgage approval what you can truly afford? It may seem like this should always be the case. However, this is not necessarily true! It’s important to evaluate your own circumstances to help determine if you can really afford the amount for which you have been approved. Here’s why your approval doesn’t always reflect your affordability, and how you can find the number that truly works for you.

Your pre-approval vs your approval

What’s the difference between your mortgage approval and the pre-approval you secured earlier in the buying process? Your pre-approval is a preliminary evaluation of your ability to afford a mortgage. It considers your current financial situation, including your income and expenses, and uses this to provide you with an estimate on what you might qualify for. This process is simply an approximation of your affordability at a specific point in time. This is the key part to understand. If your financial situation changes, or the housing market experiences a significant shift, this may impact your future mortgage approval. Pre-approvals are a great starting point, but you should not consider it to be the same thing as your approval.

With that in mind, what does your mortgage approval involve? When it comes time to secure the financing you need for a home, you will apply for your actual mortgage. This time, lenders will evaluate your finances in-depth. They will examine your credit, capacity, collateral, character, and capital, which are also known as the 5 Cs. These factors reveal your credit score, usage payment history, reliability as a borrower, and your overall “creditworthiness.” Lenders want a well-rounded picture of your circumstances and anything that might impact your ability to pay your mortgage. It is at this point that a mortgage is officially granted.

Why does your approval not always reflect your affordability?

It seems like it should be a given that whatever you are approved for is what you can afford in a mortgage. This is an understandable assumption, as your approval comes from your lender and is presented to you as an option. However, this is not always the case.

Your mortgage approval is based on the assumption that your mortgage is your top priority. Of course, every home owner understands the importance of paying off their mortgage. However, individual circumstances vary, and your mortgage approval cannot always account for your exact situation with complete accuracy. For example, you might have significant childcare costs. You may be actively contributing to a retirement savings account, or a college fund for a child. It’s possible you have aging parents who lean on you financially. It’s important to ensure that you can afford your current expenses as well as your future mortgage. Trying to give up one essential cost for another will only cause long-term stress and potential financial risk.

The largest danger of taking on too big of a mortgage is the risk of becoming house poor. This occurs when the majority of your income is spent on housing expenses, without room for other essentials. While a mortgage is always a big commitment, it should not use up all of your money with each payment.

How can a mortgage broker guide you? 

If you can’t fully rely on your approval, how are you supposed to know what you can actually afford? The good news is that you have access to mortgage professionals who can help you answer that question with confidence! Mortgage brokers work for you, and are committed to finding you the right product. This means they will take the time to get to know you and your complete financial picture. They use all this information to find a lender and product that suits your situation and sets you up for success. While a lender is more focused on your finances, a broker considers the entire set of circumstances that will impact your future mortgage. 

Securing your mortgage approval is one of the most significant milestones in the home buying process. However, it’s not over yet! You need to ensure that your approval matches your affordability, and you can use a mortgage broker to help you out. We are here to guide you towards homeownership and make sure you find the product you deserve! 

If you have any questions about your mortgage, give us a call at Centum Home Lenders! You can reach us at 506-854-6847, or get in touch with us here.