The pre-approval myth

There are few more pressing temptations to blow the budget other than when you’re shopping for a home.

You may feel pressure, emotionally (and from the market, depending on where you live) to pay any price to secure that home of your dreams.

Rest assured though, that if you max out your mortgage loan that house of your dreams may quickly become a house of debt disaster.

The pre-approval

Awesome! The bank approved you for loads of money!

Not really awesome. Never, ever max out your mortgage loan- or even scrape the ceiling just because you can afford it on paper.

Why not? Because things change.

The income dilemma

You’ve been pre-approved based on your current household income. What happens if that income is reduced or removed, even temporarily?

You are looking at the very least a whole lot of stress and at the very worst, foreclosure or debt disaster.

The market

Many people forget that the housing market is a dynamic entity. Generally speaking, property values increase over time.

However, there are certain markets and situations where the opposite occurs (and is currently occurring). What would happen if the market softened, the value of your house dropped and then you owe more than you own?

Yikes.

Don’t be house poor

Directing most of your income to your mortgage is not only financially risky, it’s no fun.  If you’ve got no wiggle room, you won’t have any spending room either- which means you can say goodbye to discretionary spending.

While you are paying towards building up an asset, that money is not liquid. You need to have enough extra money every month to be able to direct towards emergency savings that you can access in a hurry if you need to.