The Truth About Mortgages and How Much You Should Borrow

When you buy your dream home, the last thing you want is to enter into foreclosure months or years later. By knowing your limits when it comes to applying for a mortgage, you can avoid the pitfall that many people face. In 2013, RealtyTrac reported 1.4 million foreclosures were filed. While this was a substantial decrease from 2.9 million in 2010, it is still a substantial number of mortgages that people simply could not afford to pay. Know how much money you can really afford to borrow before you apply for a Texas mortgage.

Carefully Consider Your Borrowing Power

Changes to the laws in 2014 require banks to look for clients who have a debt-to-income ratio of 43%. What this means for you is that your mortgage, insurances, car loans, utility bills, and other debt should not be more than 43% of your income. If your monthly gross income comes to $4,000, your debt should not be higher than $1,720.

At the same time, there are front-end and back-end ratios. The front-end ratio is the amount of money you should be paying towards your mortgage expenses. The back-end ratio covers everything else like utilities, food, car expenses, clothing, etc. According to Realtor.com, most banks are looking for front-end ratios of 28%. Of your $4,000 monthly income, $1,120 should go towards your mortgage, mortgage insurance, property tax, and homeowner's insurance.

Weigh Your Front-End Ratio

In 2014, a home in Austin worth $180,000 comes with a yearly property tax bill of approximately $3,800, or approximately 2% of the home's value. If you factor in 2% for property taxes and take out a mortgage for $144,000 (after making a 20% down payment on the home) with an interest rate of 4%, you're mortgage payment would be approximately $987. This leaves you with $133 for mortgage and homeowner's insurances.

If you instead selected a home worth $150,000, made the 20% down payment, still had an interest rate of 4%, and a property tax rate of 2%, your mortgage payment drops to about $820 a month. Now you have $300 for homeowner's and mortgage insurances.

Don't Forgot Life Changes

The last thing to weigh when deciding how much of a mortgage you can really afford are life changes. Are you planning to retire before you've paid off your mortgage? In that case, factor in your retirement income when deciding how much home you can afford. If you're going to have children, factor in the cost of diapers, additional water and electricity usage, and the extra cost of food or formula. If there is a chance you could lose your job, you should also carefully consider if your co-borrower could handle the mortgage payment on just his or her income.

Once you've run these numbers, you'll have a good idea of how much of a mortgage you can really afford. Head to your mortgage broker, bank, or credit union and get pre-approved for a mortgage before you start shopping for a home. This puts you in the best position to make an offer on your ideal home that the seller will not want to refuse. From there, you can apply for a mortgage and be on you way to owning your dream Texas home.