Your lender will consider yearly income, your monthly debts and obligations, your credit, your cash reserves, employment history and more when calculating your maximum loan amount. Getting prequalified feels great -- but it doesn’t mean you should pull the trigger on a home at the top of your budget.
Within your prequalification amount, it’s up to you to decide how much risk you want to assume. If you want to play it safe, stick to the 28/36 rule, and make sure your monthly mortgage payment exceeds no more than 28% of your monthly gross income. As you inch closer to your lending limit, your monthly budget could feel the squeeze after closing, leaving little extra for dining out and other leisure activities. If you do buy a home at the top of your budget, it’s a good idea to consider job security, potential future earnings growth, and cash reserves as compensating factors that can offer extra peace of mind in the long term.