How Much Should You Borrow?
What factors to consider when determining your Austin mortgage amount
An article in Saturday’s New York Times contains a shocking example of one woman who borrowed too much and now faces foreclosure on her home:
“Toward the $385,000 cost, [Christina] Natale made a down payment of $185,000, a little less than what she took away from the sale of her grandfather’s home. The loan that made up the difference, with closing costs, broker’s fee, taxes and insurance, meant a monthly bill of $1,873.96, about $100 less than her monthly take-home pay as an administrative assistant.”
With three children, Ms. Natale took out a mortgage loan that left her only $100 a month for every other expense in her life. Both the lender and Ms. Natale should have determined this mortgage was unaffordable. It’s important to think carefully about how much you’ll actually need to borrow in order to purchase a new home. From the down payment to taxes to insurance and interest rates, there are many factors to consider when making this life-changing decision.
Determine your cost of living
You debt to income ratio should be between 38 and 45%. This amount is based on your gross income. The debts used to calculate your debt to income ratio are your proposed housing payment along with credit debts, such as car notes, student loans, and credit card payments. Mortgage qualifying does not take into account your living expenses such as groceries, utilities, clothing and entertainment. That’s why creating a budget and determining your cost of living is an essential step to deciding how much you can comfortably afford to borrow. And while these insights are helpful as you begin the borrowing process, it is essential to meet with a trusted, ethical mortgage consultant who can talk with you about your complete financial picture and help you create a budget, if needed. Getting pre-approved for a mortgage loan is really the only way to know the exact amount of money you can and should borrow.
Approval vs. Affordability
The mortgage crisis was caused by banks lending money to people who never could afford a mortgage. Home buyers with bad credit were allowed to take out mortgages based on stating income that was not verified. Buyers and loan officers both lied about income to help people qualify. These bad loans were often adjustable rate loans with interest rates starting around 8%, only to go up substantially after only 2 years — creating a recipe for disaster. Thankfully, new regulation prevents the worst of these bad lending practices, but it is still important to understand that there is a big difference between the amount you are approved to borrow and the amount you can comfortably afford to borrow. You need to work with a mortgage consultant you can trust and get a mortgage not only in the approval range, but in the affordable range.
What if something unexpected happens, such as losing my job?
While my job is to match you with the best mortgage available for your specific needs, I feel that it’s also my duty to make sure it’s the most responsible product as well. Whether you own or rent it’s a good idea to have 3-6 months worth of living expenses in savings, especially if you are a home owner. The last thing you want is to be unprepared for a crisis, which can amplify the emotional and financial stress of an unforeseen event. Disability insurance can protect your family in an event such as a medical crisis. Life insurance can protect your family in the unfortunate event of an untimely death. When set up correctly, a life insurance policy can pay off your mortgage so your family is not left without a home. My job is to help connect you with the right financial services agents to help you figure out your complete financial picture, and ensure you have the additional protection your family needs.
The Leaman Team wants to make sure your questions are answered. Please call The Leaman Team today to discuss your home financing: (800) 301-3405 or email Team@MaxLeaman.com.