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More often than not, our dream house is just that little bit out of reach. Perhaps it is on the other side of the world, in a city we will never live in, or is simply out of sync with the realities of our lifestyle. But usually it comes down to a matter of price. If we could get the mortgage loan of the size required, we would jump at the chance.
Lenders tend to have a streak of wisdom in them that, in the long run, helps us manage our financial situation better. We might think that denying us a $500,000 loan to purchase a house with swimming pool, overlooking the Pacific, is meanness, but it is not. The truth is that limits for mortgage loans are set with reality in mind.
The principle is based on the simple fact that there are more factors involved in repaying loans than whether there is sufficient excess in our monthly salaries. When establishing limits for loans to buy a home, details like prospective salary increases, unforeseen expenses like hospital or medical bills, and the credit to income ratio already being used, all come into play.
Simply put, what we believe we can afford is often what we cannot. Instead, experts produce a conservative figure that is designed to handle sudden changes to circumstance so that our mortgage loan can continue to be paid and our home not be threatened.
Avoiding Future Debt
The root of the motivation behind lenders setting strict limits for mortgage loans is that strained finances greatly increase the risk of falling into serious debt. Studies have shown that only a certain percentage of a monthly salary figure can be used to cover a mortgage without placing the borrower under financial strain.
Generally, just 30 per cent of the salary should be spent on a loan to buy a home. The remaining 70 per cent is needed to cover other loans, household bills, general living expenses, savings and to cover any unforeseen extra expenses.
Basically, if a salary is $6,000 per month, and monthly outgoings are $3,000, we would be tempted to state $3,000 per month is the mortgage loan repayment we can afford. But lenders will not permit more than $2,000.
There is always the chance that our financial situation will change unexpectedly, and since a home loan is a long term commitment, there is little point in thinking just 4 or 5 years into the future. For example, after 6 years, we might lose our job.
Because the limit for a mortgage loan controls monthly repayments, we can be thankful we do not face a more expensive mortgage repayment sum. After all, since it is a loan to buy a home, it is the home we would lose should we no longer be able to afford the repayments.
Trusting the Lenders
The fact of the matter is that for any mortgage loan, there are long term consequences to keep in mind. As the buyers we tend to center our attention on actually possessing what we want. The lender, however, wants to make sure they get their money back, and at a profit. So, it is in their own interests to set an affordable limit for a mortgage loan.
Basically put, our eyes are often bigger than our stomachs, especially when applying for a loan to buy a home. Lenders have perfectly focused eyes, which sees the reality of the situation. So their judgement on the size of the mortgage loan permitted can be trusted to be the most manageable based on our salary.
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