Why Banks Approve You for More Than You Should Borrow

You went to the bank, filled out the paperwork, and got your pre-approval letter. It says you're approved for $450,000. Exciting, right?

Here's what no one tells you: that number has almost nothing to do with what you can comfortably afford. Banks aren't in the business of ensuring you live a good life — they're in the business of making loans that get repaid. These are very different goals.

Understanding why banks approve more than you should borrow is one of the most important lessons in home buying. It could be the difference between building wealth in your dream home and becoming "house poor" — owning a house but having no money left to actually live.

What Banks Care About (And What They Don't)

When a bank evaluates your mortgage application, they're asking one primary question: "Will this person make their payments?"

They are NOT asking:

• Will this person be able to save for retirement?
• Will this person be able to go on vacation?
• Will this person be stressed about money?
• Will this person have an emergency fund?
• Will this person be able to afford their kids' activities?
• Will this person be happy?

Banks use your debt-to-income ratio (DTI) to determine approval. Most conventional loans allow a DTI up to 43-50%, which means banks will approve you to spend nearly half your gross income on debt payments.

The Real-World Math Banks Don't Show You

Let's look at a realistic example to see how bank approval and actual affordability diverge:

The bank says Sarah can afford a $3,004 monthly housing payment. Let's see what that actually looks like:

Sarah now has $1,596 per month for groceries, gas, healthcare, clothing, entertainment, savings, emergencies, and anything else life throws at her.

Can she survive? Probably. Will she thrive? Unlikely. One unexpected expense — a car repair, a medical bill, a broken appliance — could send her into debt.

What Sarah Could Actually Afford

Now let's see what a more comfortable scenario looks like:

With a $1,890 housing payment (about $280,000 home instead of $420,000), Sarah has $2,760 for living expenses. That's an extra $1,164 per month — money for proper groceries, retirement savings, an emergency fund, and actually enjoying life.

Why Banks Approve So Much

Banks aren't trying to make you house poor (they're not evil). But their incentives don't align with your wellbeing:

1. They make money on larger loans. A $400,000 mortgage earns them more interest than a $300,000 mortgage.
2. They're protected if you default. Your home is collateral. If you can't pay, they take the house.
3. They only see part of the picture. They see your income and debts, not your grocery bills, childcare costs, or lifestyle needs.
4. They use gross income. They calculate what you can afford based on your pre-tax salary, not your actual take-home pay.
5. Their risk models are about default, not comfort. A 43% DTI might mean you'll struggle, but you probably won't default — and that's all they need to know.

The Hidden Costs Banks Don't Factor In

When banks calculate your DTI, they include your mortgage payment (principal, interest, taxes, insurance). But homeownership costs go far beyond that:

• Utilities: $200-400/month depending on home size and location
• Maintenance: Experts recommend budgeting 1-2% of home value annually (~$250-500/month on a $300k home)
• HOA fees: $0-500+/month if applicable
• Lawn care/snow removal: $50-200/month if you don't DIY
• Higher insurance for expensive homes: Scales with home value
• Furniture and repairs: New home = new expenses

None of these appear in the bank's affordability calculation. But they'll definitely appear in your bank account.

Signs You're About to Borrow Too Much

Before you commit to a mortgage, watch for these warning signs:

1. Your budget assumes nothing goes wrong. No car repairs, no medical bills, no job disruption.
2. You're planning to "cut back" on everything. If the house requires sacrificing all discretionary spending, it's too expensive.
3. You can't max out your 401(k) match. If you're giving up free retirement money for a bigger house, reconsider.
4. Your emergency fund will be depleted by the down payment. You should have 3-6 months of expenses saved after closing.
5. You're counting on future raises. Buy based on current income, not projected income.
6. The mortgage payment makes you nervous. Trust your gut. If it feels like too much, it probably is.

How to Find Your Real Number

Instead of asking "how much will the bank approve?", ask:

1. What's my actual take-home pay? Not gross income — what hits your bank account.
2. What do I actually spend on living expenses? Look at 3-6 months of bank statements.
3. What should I be saving? Retirement, emergency fund, other goals.
4. What's left for housing? This is your real budget.

A general guideline: try to keep total housing costs (including utilities and maintenance) under 35-40% of your take-home pay. Under 30% is even better.

The Freedom of Buying Below Your Approval

Buying less house than you're approved for isn't "leaving money on the table" — it's buying freedom:

• Freedom from stress when unexpected expenses arise
• Freedom to save for retirement, travel, or your kids' education
• Freedom to leave a bad job without financial panic
• Freedom to enjoy your home instead of just paying for it

The best house isn't the most expensive one you can technically afford. It's the one that lets you build wealth while living well.

The Bottom Line

Bank approval is a ceiling, not a target. Just because you can borrow $450,000 doesn't mean you should.

The bank's job is to make loans that get repaid. Your job is to build a life that's financially healthy and enjoyable. These goals can lead to very different numbers.

Before you start house hunting, know your real number — not what the bank says you can afford, but what you can afford while still living the life you want.