Too many home buyers, especially first time home buyers, turn to lenders to find out what price they can afford to pay for a house. This is an unfortunate, misguided practice, as lenders can’t tell what you can afford.

The reason for the confusion is largely because lenders do tell you how much they will let you borrow. This happens when they prequalify you for a mortgage loan. But the amount they will let you borrow and the amount you can afford to borrow are often two different things.

How prequalification plays a role

Prequalification is simply the process of plugging your financial numbers into an equation combined with a few other factors such as your credit rating. Based on the outcome of the equation, your lender tells you how many thousands of dollars he or she is willing to lend you. You’re also told how much your monthly mortgage payment will be, based on the size of loan.

Too often, individuals digest the amount they’re prequalified to borrow and assume that it’s what they can afford. Why?  Because the lender told them they could. But that’s not the whole picture.

Why prequalification can be misguided

The problem with prequalification is that it is merely a snapshot of your public financial records. Lenders look at your income, your debts, your financial history, and your risk as a borrower. They know nothing of your personal obligations and spending habits.

If a lender sees that you make $80,000 a year but have only $10,000 in debt, then your debt-to-income ratio will be very low. The lender will assume that you make regular payments on your debt load and that the rest of your income is disposable, going to food, clothing, entertainment, etc. The lender may prequalify you for a mortgage that requires you to spend the bulk of your remaining income.

What the lender doesn’t know is what you actually do with that money. Say your $10,000 of debt is all credit card debt, which is why it is public information. But perhaps you also owe a family member $5,000 for a personal loan. That’s money you owe but which your lender knows nothing about. Alternatively, you may have bought a car through a private deal with a friend, adding $12,000 to your debt load.

Along with any hidden debt you have, your spending habits may be higher than average. Maybe you have a medical condition that requires expensive medication each month. Or you have six children – and they’re not cheap to feed. Perhaps you board a few horses in a local stable that requires you to pay a monthly fee.

Only you know what you do with your money

The bottom line is that you know your spending habits best. You know your financial obligations beyond what is publically listed and beyond what your lender can access.

To be a successful homeowner, you must decide – without the help of your lender – how much money you can afford in monthly home expenses. It’s essential that you create a budget that shows you exactly where your money goes and how much is left over for housing costs.

Even after you’ve decided how much money you can afford to pay on your mortgage, it’s important that you don’t expect that same amount to equal your monthly mortgage payment. You must build in room for closing costs on your new mortgage along with money for property taxes, home repairs, and other miscellaneous expenses related to being a homeowner.

Remember:  Lenders can’t tell what you can afford – you’re the only one who can come up with that answer.