Reply to How much can we afford to spend on home?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]I disagree.  Don't go over $800. But really, the issue is your take home v.  The payments.  Give us those numbers and we can help better.  Also, are you looking in a school district that will likely keep your kids out of private?[/quote]

This is shitty advice. $800 is only 2.86 times gross. This is an entirely arbitrary figure. There are various calculators out there and [b]there's a reason the bank pre-approved for 1.2 mil. [/b]

[/quote]

oh my... a fool is born every day.

The reason the BANK or a mortgage broker approves you for $X loan is b/c they stand to gain when you take out a bigger loan.  They also don't care whether you save for retirement, save for kids college, go on vacation, buy clothes, pay for car repairs or pay your gas bill.  That is not their concern.  That should be your concern.  If you want to off-load the decision-making, then at least off-load it to someone who has nothing to gain from the decision (i.e. a financial advisor/author, your mother?, your neighbor? anyone other than "the bank").

Hey fox... do you think I should put the chickens in a henhouse with a lock or without???[/quote]

You are partly right. Let me fill I the blanks (I do credit risk mgmt).

Banks want to approve you for as much as possible - within bounds - for three reasons: larger loans generally demand higher rates (more on that in a minute), the revenue stream is of course larger and on per account basis that translates to lower costs (to illustrate, which would you rather have: one hundred $1 loans that you have to manage and mail or two $50 ones?), and third loans are binary. If the loan isn't sufficient to get the house you want they get $0, but probably still incur some expenses.

So, banks don't have your best interests at heart, they have their own. It's the same reason your credit cards offer you $20,000 lines - it's not because you can or should use that much, it's because, if they don't offer you enough then you'll use some other credit card to fill in the amount you wish you had. In credit cards at least they capture some of the spend; in mortgages it's fully binary. You get all or none.

At the same time banks need to manage risks so they'll extend as much as their policy and risk management guardrails allow, but they'll also test those boundaries at times to validate the curves and projections. This is art as much as science. You really have no way of knowing if your credit app was processed as part of special batch because of some particular flag or if it wasn't. They may be testing their ability to appropriately price risk in high end segments.

Seriously, I do this risk modeling for a living. What you are approved for is not an indication of what you should borrow, it's a reflection of revenue projections, competive response, local markets, testing, imperfect probability matrices, and expected charge off risk.

/soapbox[/quote]

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