How the Approval Process Works

• When you apply for a mortgage, your prospective lender will check your credit and vet your finances thoroughly. It will calculate how much you can afford to spend on housing, including insurance and property taxes, based on your pretax income and available down payment. This means you really aren't in control of how much you can spend. Lenders like borrowers to keep their total debt load to less than 36 percent of pretax income, of which 28 percent is allotted for housing. Theoretically, you can borrow up to this amount and no more; in the past, lenders allowed borrowers to exceed this limit, although since 2007's housing downturn most have tightened their purse strings.
  
  

Deciding Your Limit

• Ultimately, you'll have to decide how much you are comfortable spending on housing. Keep in mind that homeowners pay a lot more for the privilege of ownership. Repairs, maintenance and upgrades are suddenly your responsibility. You should also be prepared for higher utility costs. Committing to a bigger mortgage than you need up front requires very careful consideration; spending too much on your mortgage leaves little budget breathing room elsewhere. Are you willing to sacrifice vacations, new clothes and eating out -- and for a long time? If you aren't, then taking out more than you need may not be wise. Remember, you don't have to spend up to 28 percent of your pretax income -- that's the maximum, not the guideline.
  
  

Borrowing More than Your Home is Worth

• Within your income limits, you may be able to borrow more than the purchase price of your home if you agree to spend the extra funds on its renovation. The Department of Housing and Urban Development offers interested borrowers the 203(k) rehab loan, which can be used on single and multiple family residences, as well as condominium properties. Dreaming of a government-financed SubZero fridge? Think again; HUD doesn't permit "luxury items and improvements," according to its website. However, it does encourage renovations related to energy efficiency.
  
  

Considering the Ramifications

• You only have to ask one foreclosed homeowner what losing a home is like to hear all you need to know about the dangers of borrowing more than you can reasonably afford to repay. Short sales are only slightly better. If you borrow too much and can't afford the payments, things get ugly fast. Not only is your credit severely tarnished, it's difficult to recover and it may be several years before you can buy another home. Make yourself a budget before you proceed, and do yourself a favor: Don't even look at any homes you know you can't afford.