January 28, 2009
You are not fooling the bank, why fool yourself.
The time has come to make that huge leap in life. You have finally decided that your family has outgrown its cramped quarters and to rent a larger space would cost you as much, if not more than a residential mortgage. You are able to do the math and you have wisely decided that owning a home allows you to build equity as opposed to paying a landlord and never seeing that money again.
The main goal now is to find a house that fits your family as well as your budget. The first thing you are going to do is run to your mortgage broker to get a prequalification for a mortgage. This move you hope will achieve two objectives.
1) You will lock in a mortgage rate to protect yourself against any upward trend in the market, and
2) You will establish how much the bank is willing to lend you based on the financial information that you provide.
The banks have certain guidelines and calculations that enable them to determine your net worth, your monthly expenses, and your ability to repay them, because after all, that is the name of the game.
The banks guidelines require you to give them your everyday costs of living, which include credit card payments, bank loans, car payments, and hydro bills. This would normally give them a good idea as to what you can afford and the credit check which they perform on every client will indicate whether you have ever been delinquent on debt repayments, and if you have in fact informed them of all your debts.
There are of course debts which do not show up on any credit check, such as personal family loans, or even private school tuition. You can certainly avoid mentioning these responsibilities to the bank, and they of course being none the wiser, will approve you for a much higher loan. Great, they have agreed to loan you more money and that of course will translate itself into your buying a much larger home. Now it’s time for you to sit back, and truthfully take stock of your repayment capabilities. You have 3 children in private school which carries tuition fees, perhaps upwards of $24000.00 annually. Your children’s education is adding an additional $2000.00 monthly to your debt load.
Now, who have you fooled?
The bank has lent you more money than you can afford. Your finances are suddenly choked and there is no help on the horizon. You are in dire straits, which might lead to your defaulting on your loan. Should the bank have to foreclose due to non payment, they end up repossessing your home, and you are literally out on the street. Think about it, who have you fooled?
Be honest with yourself and enjoy the life of being a homeowner.