When Applying for a Mortgage

When applying for your mortgage, do not ask the lender to figure out the maximum mortgage you can afford, so you can buy the biggest house possible! There is a terrible risk facing you when you let your ego lead you into doing this. You may lose what is important to you, your wonderful, ideal family house, when you can’t afford the upkeep of your lifestyle.

You should know how much you can afford – don’t ask someone else. Especially don’t ask a loan officer or bank manager how much you can afford to pay on your mortgage installment each month. This is a sure recipe for disaster, as the employees of the bank or the private lender will write you off as a non-serious risk taker.

Consider this: Lenders and banks have sales targets to meet and will likely use every bit of borrowing power you have to sell you a bigger mortgage, bringing them closer to their sales targets. Mortgage specialists and mortgage brokers are paid a commission on the amount of mortgages you are approved for, which means both lenders and brokers are focused on their own needs far more than your needs – they are motivated by different objectives than you. You are motivated to borrow and buy a house. They’re motivated by salaries, awards and bonuses to sell as much debt as possible to qualified individuals.

Never give away the financial cushion of having less debt to pay when bad times arrive. It could be all the difference it takes to keep your house. You may qualify for the bigger mortgage. While the lender or mortgage broker isn’t lying to you, you must think first about other things. You must think even more conservatively than the bank and their perspective loan officers.

Planning for More Debt in the Future

What if your car is getting old and will need to be replaced within a year? What if the house you are buying needs a new kitchen or bathroom that must be financed by a loan next year? Just two things alone that can cause significant hardship if you don’t have borrowing power available beyond your mortgage payment. If you maximize all of your borrowing power on your mortgage and it’s monthly principal and interest payments, you will not have room to borrow for another car – new or used.

You won’t have room to service a renovation loan for that kitchen or bathroom. You will be what is referred to as being “mortgage poor”, meaning you can’t afford to do anything, go anywhere, or buy anything because all of your money goes toward meeting your mortgage payments. How happy would you become in your larger, debt strapped home?

Your car may stop working, you won’t be able to buy another and that could prevent you getting to work each day to earn a paycheck to service your monthly commitments. Can you see where this is going?

Plan for 2 to 5 years down the road when applying for your mortgage. Consider the replacement of your car, loans you may need, and always the savings you would like to put away each month for your retirement. Do you have enough cash at the end of the month to contribute to your 401(k), some medical insurance product, or another investment? Have you considered that interest rates may rise significantly in the future compared to the rates you have now? If they do rise when you need to renew your mortgage it could be the difference between being able to afford your new big mortgage payment each month and losing the house you have come to love and worked so hard to acquire and make comfortable.

If you are going to ask someone to tell you how much of a mortgage you can afford, then ask them to also include a possible new loan and/or car payment that could happen within the next five years. They will look surprised with this request, but will include it into their debt servicing calculation. Don’t be surprised that the amount of mortgage that was originally affordable, has likely been reduced by several thousands of dollars! This, realistically, is the amount of mortgage you should be considering as your maximum.

Difference Between US Consumer Banks and Canadian Consumer Banks

To go off the track a little bit here, I would like to quickly mention how the Canadian consumer banking system works compared to the American banking system. If you are an American and you go to a bank and they don’t lend to you unless you have an extremely secure income stream and you have taken into account that you may accumulate more debt in the next 10 years, you may consider this bank to be hyper conservative, and not even fair. Well guess what? In Canada this is what your average lender would expect before they lend you a single dime. This is likely why the Canadian mortgage market and central bank was not as badly beaten up during the great recession crash of late 2008. So if you are an American citizen and you have a bank that is more than willing to lend you crazy amounts of debt, don’t go ahead and take that loan! Ask yourself if you really can afford to service the payments on that loan.

Try running different payment scenarios at higher interest rates to see if you’re still able to afford that mortgage should the rates go up by the time you need to renew. Now, when something happens to the old car, or the house needs renovations, or interest rates go up significantly, you can proceed with confidence knowing that you are able to afford the additional payments.

You may not have caught it yet, but you are managing a stronger credit rating through the above example. You know you can afford what you have, and can make increased payments should your circumstances change. No matter what, your credit rating will be preserved through all the changes that may come by, keeping your status as a preferred, healthy and strong client, with available boring power and a viable income stream.

Keep in mind that it is easy to manage your own limits and credit rating. Don’t leave it in the hands of people that may not always have your best interests in mind! It’s your financial strength and health at stake; don’t be so quick to take a big loan and hand over your security to an unscrupulous lender.

Continued in the Carol’s Borrowing Series Category of Clf.