Whether you’re a first time home buyer needing your first mortgage or if you’re an experienced home buyer ready for your next home, knowing how the mortgage process works and how to qualify for a new mortgage is an important first step in the process of buying a home.
You’re obviously not expected to know the various acronyms and details involved in how to qualify for a mortgage, but having some general understanding of the process and expectations will put you in the best financial position for buying a new home. It’ll also simplify the process for you.
Credit scores required for a mortgage
Your credit score is really the starting point that most mortgage lenders look at in determining your mortgage qualification. While credit scores are certainly not an indicator of wealth, they do provide a baseline for lenders to determine your creditworthiness. It’s also the tool that determines all of the other ratios we’ll look at below and the interest rates which you will qualify under.
The higher your credit score, the lower the costs of getting a mortgage and the lower the interest rates will be. For the most part a minimum credit score of 640 is needed, however there are several programs available for home borrowers with credit scores as low as 580.
Income requirements for a mortgage
Your income shows the ability to repay the mortgage. Income combined with credit score make up a large portion of what a mortgage lender look at when qualifying you for a mortgage. Mortgage lenders are looking at your Gross Monthly Income. They prove this income through your W-2’s from your employer, your paycheck stubs from your employer, and your 1040 tax return from the IRS. They’ll also consider other regular income that isn’t salary based like dividends from stocks or company ownership, child support, or other income that is consistent.
Your income is the starting point in mortgage calculations for how much mortgage you can qualify for.
Qualifying limits for a mortgage
Obviously credit scores and income are important pieces in qualifying for a new mortgage. But they are only the starting pieces of the puzzle mortgage lenders look at when issuing a mortgage.
One of the most important pieces is actually your Debt-to-Income ratio (DTI).
This ratio is calculated by adding up all of your current debts like car payments, student loan payments, minimum monthly credit car payments, and other debt payment plus adding in the future estimated mortgage payment. Then you divide that monthly amount by your provable gross monthly income. This will give you a percentage of debt-to-income.
Depending on your credit score, there are different limits for this DTI ratio. The higher your credit score, then the higher your DTI ratio can be and still qualify for a mortgage. But it is fairly typical for the limit to be around 42% maximum as a good rule of thumb. There are circumstances and loan programs that will allow for this ratio to be as high as 50%.
This is process is how mortgage lenders determine how much house you qualify to purchase as a maximum. They start with your provable income, verify the maximum DTI you are allowed to have based on your credit score, and calculate the maximum amount of monthly payments you can have. Then they subtract out your existing debts, which leave them with the maximum monthly mortgage payment.
House Qualifying Limits
Loan-to-Value (LTV) is another important piece of the puzzle that determines several aspects of your qualifying limits. The LTV is the percentage of mortgage you’re borrowing against the value of the property. Your downpayment helps to determine the Loan-to-value.
An FHA mortgage will allow you to have a minimum down payment of 3.5% of the purchase price. While there are conventional programs that have various down payment options starting as low as 0%, the most common minimum down payment percentage allowed on a conventional loan is 5% down.
The LTV is a risk measure for the mortgage lender. The smaller the down payment you have, then the higher the LTV ratio is which means the higher the risk the mortgage lender is taking by issuing you a mortgage. Therefore they price their loan accordingly to the risk they’re taking.
A 20% down loan will have fewer closing costs, lower interest rates, and no Private Mortgage Insurance, whereas a 3.5% down payment will have higher overall costs associated with the mortgage.
These mortgage costs all factor into the estimated monthly mortgage payment, which ultimately carry into your DTI ratio for qualifying. Remember, your DTI ratio has to be under the maximum allowed limit as determined by your credit score and loan program.
How to Estimate a Mortgage Payment
There are 4 pieces to a monthly mortgage payment: Principal, Interest, Taxes, and Insurance. There’s a 5th piece called Private Mortgage Insurance (PMI) if your LTV is higher than 80%.
You can calculate the Principal & Interest (P&I) portion of your payment using any payment calculator. A 30 year loan (360 months) or 15 year loan (180 months) with the total amount of money you plan on borrowing for the mortgage with an average market mortgage rate. This will give you your fixed monthly payment.
Taxes are fairly simple to calculate, although they can be different for each house on the market. The easiest way is to look up the local tax rates and multiply that percentage by the sales price. Divide by 12 and that’ll give you your monthly tax bill. The more specific way is to go to your county website and find the actual tax bill for each property you want to buy and divide the amount by 12.
Homeowners insurance varies by geographic location, company, type of house, age of roof, square footage of house, and price point. It’s difficult to estimate this annual premium without knowing a specific house and receiving a quote. However mortgage lenders in your market can make an educated guess based on their knowledge of recent loans and housing types in the area. You can always ask your mortgage lender or a Realtor in your area how much you should estimate for homeowners insurance. A good rule of thumb is $200/month, knowing that it could be more or less depending on the house and time.
You take these 4 elements, P&I, taxes, and insurance and add them together for your estimated mortgage payment. If you have less than 20% down payment, then you’ll need to also add in an estimated PMI payment (Private Mortgage Insurance). There are calculators online for this and the actual amount will vary depending on LTV, credit score, and overall amount financed. A general guideline would be $130/month knowing that it could be more or less.
How to qualify for a mortgage
These are all of the primary elements that go into mortgage qualifications. A mortgage lender takes your credit score and provable income to start the process and figure out what loan program may work best for you.
They look at your down payment percentage on a specific house to determine the LTV. Based on your credit score and loan-to-value ratio they then are able to calculate mortgage pricing for origination and interest rate costs as well as PMI.
They use all of that information to determine the estimated monthly mortgage payment including taxes, insurance, and PMI.
They then add that new estimated monthly mortgage payment to your existing debts. If the total of those debts divided by your gross monthly income is under the DTI ratio requirement, then you likely qualify for the mortgage.
What options are available if you don’t qualify for the mortgage?
After all of those elements are reviewed, if you come back not qualifying then the mortgage lender reviews each of those individual elements to see where adjustments could be made.
Maybe, your credit score is 714 which gives you a 45% DTI maximum but at a 720 credit score your qualifying DTI maximum would increase to 48% under some circumstances. If you have revolving debt like credit cards that have a high utilization rate, then paying down those credit cards would increase your credit score enough to get into the better pricing bracket.
Maybe you have enough cash available for down payment to get to 20% down instead, which eliminates PMI from your calculations and would get you under the maximum DTI limits.
Maybe there’s other income you forgot to include in your application that would increase your Gross Monthly Income enough to get under the maximum DTI limits.
Maybe you have a retirement account or savings reserves that give you 6+months of reserves the lender can use to increase your qualifying ratios.
There are dozens of different things mortgage lenders can do to adjust and help you in mortgage qualifying.
Should you get a new mortgage?
Just because you may technically qualify for a mortgage doesn’t mean you should rush out to buy a home. There are guidelines out there that would allow you to buy a house where the monthly mortgage payment is 50% of your gross monthly income. There’s not a financial advisor in the world that would say that is a wise decision, even though you could technically qualify for that loan.
Your first step is to make sure your financial house is in order, that you have your consumer debts eliminated or super limited, and that you have enough cash in the bank for a down payment. Then determine how much you personally feel comfortable budgeting each month for your housing costs (20%-33% is a realistic and understandable amount for most families in the US.)
From there, you should meet with a professional Realtor to help you start narrowing in on all of the details in purchasing a home and helping you navigate the process. Your professional agent will have several mortgage lenders that will help you qualify for a mortgage and get the process started. If you’re in the DFW area, our team would love to help you get qualified for a mortgage and buy your new home. Learn more about our team and how we help home buyers here!
We are living through a massive population boom and time period where cities and metro-areas are seeing a surge in people moving inward toward urban centers rather than rural. The reasons are many, including opportunity, education, jobs, healthcare, quality of life, amenities, and affordability as well as changes in economic shifts around the globe.
Whatever the reason, more people are moving into metro-areas and the towns and suburbs on the outskirts are finding themselves right in the middle of the growth explosion.
It is certainly a change and many cities are finding their longtime residents saying, “we want to stay small and keep our hometown feel” even though they probably haven’t been a small town in quite some time.
My hometown of Mansfield, TX is one of such cities. Settled around a new grist mill in the 1850’s, Mansfield has doubled in population every 10-15 years since the 1960’s. It’s located about a 20-30 minute drive from Downtown Dallas, Downtown Fort Worth, and DFW International Airport. It’s a 20 minute drive to a Dallas Cowboys or Texas Rangers game. The city sits in 3 counties at the intersection of a new major toll-road and the longest highway in the United States. Housing prices, even in the craziness of 2022 real estate, start around $200,000 and grow up over $2 million with a median price point around $450,000. Roughly 1,000 new houses are being built and sold each year with an average price of $650,000. In 2000 the population was 28,031, which isn’t a small town by any means. By 2010 the population had doubled to 56,368 and today in 2022 the population of the city is around 80,000. It’s the 3rd largest city in Tarrant County, which is one of the fastest growing counties in the Country, and surrounded by thousands of acres of developable land in other major cities like Grand Prairie, Arlington, and Midlothian, TX.
The reality is, Mansfield, TX is currently a big city that is going to be a really large city and economic powerhouse for the region in the not too distant future. But we also have a tremendous number of people that lived here in 1985-2005 when we were “small” that want to keep that feel.
So how do you keep that small town feel that everyone loves and craves while still being in the middle of a massive population boom toward being a large city?
The Small Town Life
Here’s what I’ve found to be true. We all remember our hometown most fondly from a perspective of our own past. We think about high school and how we knew everyone on campus, or at least those in our social circles. We think about the parties we attended or the community events at a park. We remember the places we hung out as a teenager with our friends after the Friday night football game. We remember helping Mr. Smith get his tractor out of the mud. We remember running up the street to the corner store where we were likely to bump into someone we knew and strike up a conversation. We knew we’d see all of our friends at church on Sunday morning and likely have a potluck for lunch after service. We played sandlot baseball from morning to dusk all Summer with our friends in the vacant field nearby. We met with our neighbors to help clean up litter from downtown. We joined together with others to paint a park bathroom or to build the volunteer fire station. We attended the elementary school play, held a PTA meeting, and fellowshipped with the other families in our kids schools afterward.
Small town life for most of us is remembered from a time period where we were active participants in that small town life. Our schedules were consistent. We did the same thing every day and every week. And we were actively around the same groups of people, often just by happenstance.
But as we’ve grown older – as our small towns have grown into cities – as a new generation has grown into adulthood – and as we’ve each added on other personal responsibilities in this more complex and hurried life we live now in 2022, WE have become less active participants of small town life and become more a consumer of our city. We’ve built entire neighborhoods and communities that allow us to isolate ourselves from each other, park in our garages, never go outside or bump into a neighbor, easily commute out of town for work, and avoid all interaction with anyone else that lives in our community if we don’t want to. The small town life has not left our cities as they have grown larger. We have personally removed ourselves from shaping our communities and as a result left it up to city professionals and a small group of public servants to try and meet our individual needs and desires.
I regularly hear that phrase, “we want to stay small and keep our hometown feel.” But my personal experience is that I live in a really great place with a really great hometown feel. This disconnect really jumped out to me a few months ago at our annual Volunteer Appreciation Celebration.
Several years ago, rather than constantly issue code violation citations to residents that couldn’t afford repairs to their property, let alone a citation, Mansfield started the Mansfield Volunteer Program to help address these code issues. We partnered with community organizations to solicit help from volunteers and businesses in our community to clean up landscaping, fix broken fences, repair houses, and more. The program was a huge success and has grown to have over 55,000 hours of donated sweat equity annually. We’ve won dozens of awards as a City for this innovative program. Each year we celebrate and honor the volunteers that help make our City great.
As I was shaking hands and passing out awards it became abundantly clear that I know each of these people. They’re the ones that serve on our Boards and Commissions at the City. They’re plugged into their church groups. They serve in other community organizations. I see them weekly in a coffee shop or restaurant. Our kids play sports together. They host their own community events and meetups. It’s the same group of people that are plugged in and actively engaged in our community and we all know each other. We’re all friends. And we all love serving the people of this city together. I get to experience that same small town hometown feel with these people because we’re all active participants in small town life, even though we’re living in a 36 square mile – 80,000 population – fastest growing region in the Country.
But the other thing that jumped out at this event is that those who are most vocal about their negative views of our city – those who are most vocal about wanting to keep our city small and to keep a hometown feel – the ones that push back against every new development for growth or any city initiative for improvement – they were nowhere to be found at the event. They are consumers rather than active participants in shaping a hometown.
Getting Involved in a Small Town Life
I believe any of us can experience a small town life regardless of the size of the city where we choose to live. But it does take being intentional. This doesn’t just happen. You are going to have to make some efforts here to get involved and engage in shaping your hometown. Fortunately, these areas are easy and the opportunity is great! Here are a few ideas to get started:
Engage in your local church: Weekly church services, especially post-pandemic, have become a place where it is easy to be a consumer of church rather than actively involved in serving others. But your church needs help! Volunteer to be a greeter, help in the parking lot, serve in the children’s ministry, chaperone a youth group trip, join a small group or Sunday school class. Your church is also a built in community for you to know and be known. Your pastor can find a way for you to get plugged in to an area of weekly or bi-weekly service and help you connect with others that live in your city.
Become a regular: Go to the same coffeeshop the same day each week. Visit the same local restaurant for lunch on the same day each week. Stop in the local candy store with regular frequency. Get to know the owners. Sit down long enough, frequently enough, and the other regulars will naturally interact with you. “You wanna go where everyone knows your name.” Then go to the same place regularly and interact with those around you and you’ll soon find that to be your reality.
Reach out to your local leaders: You should know your local City Council Members, School Board Members, and if possible your City Manager and Superintendent. These public servants would love nothing more than to find ways for you to engage and serve the community. Their email addresses are typically posted on the school district or City website and they are usually very accessible. These are often the most dedicated people that love your city. They know just about everyone in town and can get you connected to programs, organizations, and resources anytime you may need them. Introduce yourself by email and let them know you’d love to meet them and see if they can help you get plugged into the community.
Join a local community group: You probably have a rotary club or similar in your town. These groups are full of leaders that love to give back to their community. It’s a great opportunity to know others that serve and volunteer to help others.
Serve at a food pantry, clothes closet, or mission center: There are people in your community that have food instability. There are kids in your community that don’t get new clothes at back-to-school time. Someone has to help provide for those needs. Fortunately, your community probably has organizations nearby to help. They just need volunteers to make the logistics work. You can fill that need!
Work where you live: I know that this isn’t always simple as we often move to metro areas because the job opportunities are abundant in the entire region. But as someone who spends 90% of their time within 2 square miles of their home putting few miles on vehicles and wasting time on a commute each day, working in the city where you live is one of the fastest ways to feel connected to your entire community.
Coach your kids sports team: Few people step up in this area, but it’s a great way to create small communities of families that will be together for an extended period of time each week, possibly for years. As the coach, you can help keep that team and group together for years.
Walk Places: This isn’t always easy, because we’ve built neighborhoods in favor of vehicles instead of pedestrians. But when and where possible, you should get out for a walk. Get to know your neighbors. If you can, walk to the corner store a few days a week and engage with the clerk. Walk at the park at the same time each day and you’ll likely bump into other people who are doing the same thing.
Keeping Small Town Life in a Big City
The bottom line here is that YOU can keep small town life regardless of how big the city is where you live. You can make intentional choices to build relationships in your community, serve the people around you, and shrink your own circles so that you regularly are bumping into people you know and shaping the community where you live. If you do this well, it won’t matter how big your city grows or how many people move to town. You will still be able to call it your hometown.
We made a catastrophic mistake in the name of “protecting property values.” We did it too well! Over the last 50+ years or so we’ve slowly and unintentionally made it illegal to live somewhere other than in large single family homes or in luxury apartments.
During that time period we have created entire zoning ordinances that require minimum square footage homes on minimum sized lots with minimum setbacks from neighbors and streets. We’ve prohibited generational living such as building a mother-in-law suite and guest homes are prohibited from having someone occupy them full time. We’ve let HOA’s and municipalities put ordinances in place that restrict our ability to let our aging parents live in a small apartment in our backyard. How crazy!!?!?!
We did all of this just so we could “protect our investment” into our single family neighborhoods by keeping out any other development (and people) that doesn’t look exactly like our own. God forbid someone might allow a newlywed couple to live in an over the garage carriage house while they save for a down payment! The world may literally end if our single family home sits adjacent to a really beautiful duplex where a family owns one unit and rents out the other unit to help offset the cost of their mortgage! I think the sky may actually fall if a quadplex even shares the same air as a Country Club neighborhood.
We have protected property values so well that we now have increasingly expensive single family neighborhoods all over the country. We’ve refused to build anything near those single family homes that doesn’t meet some subjective standard of quality that changes over time. And they’re now getting to the point where homes are flat out of reach for a new generation of homebuyers.
If real estate is one of the best ways to build generational wealth, to break generational poverty, and provide financial stability for families… which I believe it does… then EVERYONE DESERVES THAT OPPORTUNITY!
Accessory Dwelling Units help to solve this home affordability crisis by providing new options for renters and property owners.
An ADU is simply a secondary dwelling unit that is built on a single family lot and occupied/rented by someone else. They’re sometimes called carriage homes, garage apartments, granny flats, mother in law suites, backyard cottages. Sometimes they’re attached to the single family house or even a finished out basement. Other times they’re a detached structure on the side or in the backyard. 150 years ago it was uncommon that anyone but the extremely wealthy could afford a single family home without putting the land to use. It was a sign of extreme wealth to have a front lawn that’s only purpose was to grow grass that had to be mowed every week. The average family had to utilize as much of their land as they could to help financially pay for their home.
ADU’s help average property owners build wealth, but they also provide an affordable home option for a variety of people that live in a community. Maybe your aging parents need a little assistance from time to time and want to maintain their independence without owning their own single family home. Perhaps your college graduate just moved back home while they’re starting out in their first career and can’t quite afford the rent at one of the luxury apartments in town, but wants to be out living on their own. The recent high school graduate that’s working full time in the restaurant around the corner while they figure out what’s next in life likely can’t afford the rent at an apartment complex with tons of amenities, but they also need to be out living on their own instead of with family for whatever reason.
Building Accessory Dwelling Units on your single family property creates unique housing options within your community to address home affordability options while also creating wealth building opportunities for you. It’s literally a win-win scenario.
Yet for the vast majority of single family property owners that live in the United States, they are illegal to build. The zoning in your community most likely doesn’t allow for them. And if the zoning does allow for them and you live in an HOA, then your HOA likely prohibits them.
We could almost overnight change this home affordability conversation. We could create opportunities for you and your neighbors to build a she-shed in the backyard and rent it out for a few hundred dollars each month to someone needing a different housing option. It’d generate income for you as well as help you grow your equity in your property. It’d give someone else in a different life stage than you a housing option other than splitting luxury apartment rent with 3 other people. It’d let new homeowners find ways to generate extra income to help offset the rising mortgage costs.
We can solve this problem. It just takes your local governing body to quit making it illegal for you to build a small apartment for your kids grandmother to live in your backyard.
The Tarrant Appraisal District mailed out property value notices for 2022 this weekend.
You may have heard the real estate market is on fire so the value you see on your TAD Blue Form may not be a surprise to you. But if we’ve learned anything the past several years it’s that higher property values also likely mean higher property taxes.
There are a few things in place this year (HB3 & SB2) that the Texas State Legislature has done to minimize the impact of rising property values on our property tax bills. But you should still understand the process involved and do what you can to lower your annual property tax bill.
The Process of Calculating Your Tax Bill
Your property tax bill is actually a two part calculation that happens each year. Part 1 is happening right now from April-May and is where the Chief Appraiser for the Tarrant Appraisal District assesses the property value of each piece of property in the County. By State Law the Chief Appraiser is required to determine the taxable value of your property as of January 1 of the tax year and notify you by a certain date.
The Chief Appraiser will then deliver each taxing entity like the city, school district, and county a preliminary tax value number. That occurs on April 30th of the year.
We are then in what is commonly known as the “Protest Period.” This is where property owners have the right to protest the value of their property assessed by the Chief Appraisers office. The deadline to apply for your protest is typically around May 15, or 30 days after you receive your valuation notice. Property owners work with the Tarrant Appraisal District during this time period to come to an agreement of the fair market value of their property, based on January 1 of the taxing year.
During that time period the individual taxing entities begin preparing their budgets for the upcoming fiscal year. At the end of the Protest Period, the Chief Appraisers Office delivers a Certified Tax Roll to each taxing entity. This moves us into Part 2 of how your tax bill is calculated. The certified tax roll is then what each taxing entity uses to determine what tax rate they need to charge in order to fulfill the budget they have built for the upcoming fiscal year. Public hearings on the budget and tax rate must be held prior to the adoption of the tax rates. These meetings typically occur each year in September as the fiscal year begins on October 1.
Your tax bill is then calculated by the County Tax Assessor Collector by taking your taxable value assessed by the Chief Appraiser, deducting out any eligible exemptions, and then multiplying those values by the tax rates that have been adopted by the elected officials. The tax bills are mailed out in November of each year, with a due date of January 31 of the upcoming year.
If you have an escrow account attached to your mortgage, your mortgage company will pay the tax bill on your behalf, typically in December of each year. If there is a shortage in your escrow account you are notified sometime later in the Spring of the shortage and given the opportunity to bring the account current and your mortgage payment adjusts so there is not a shortage again the next year.
So what should you do about your property value notice?
If the Market Value of your property is higher this year than it was last year, it is likely that your tax bill will also be higher when it is calculated later this year as rates don’t change substantially year to year. Your best chance to help yourself is by protesting your property tax value with the Tarrant Appraisal District.
The reality is, they have not looked personally at your property. They do not know the condition of your property. In many cases they don’t know what you paid for your home. They don’t know if it is updated or out of date. They don’t know if you have brand new windows or if your whole home is falling apart. They don’t know dozens of factors that help determine the actual value of your property. They’ve used computer algorithms and a database to make an educated guess. And their educated guess is often wrong. Their job is to get the appraised value accurate and the Protest Period is their (and your) opportunity to make sure they get it right. By minimizing the increase that the Tarrant Appraisal District adjusts your taxable value, you give yourself the best opportunity to avoid skyrocketing property tax bills.
If you’re a Mansfield ISD area homeowner, we’ve created a FREE tutorial that walks you through the process of protesting your property tax value with the Tarrant Appraisal District. You can sign up for that free tutorial here!
When I first moved into the community where I live it cost me roughly $6,000 out of pocket. My monthly mortgage payment including property taxes, insurance, and PMI was $1,650 each month. I moved into a brand new 2,150 square foot home on a cul-de-sac with a pond view, 3 bed/2 bath plus an office, gas log fireplace and a second living room. I was 21 years old.
I sold that home 9 years later and made $74,000 in profit (even going through the housing collapse and Great Recession). That same home is now 15 years old and costs roughly $225,000 more than I paid for it when it was new. The windows have lost their thermal seals, the roof probably needs replaced, the hot water heater definitely needs replaced, and the HVAC system is likely on its final days.
In order to buy that home today a buyer would need roughly $30,000 in cash to put down at minimum (if they could get a seller to actually accept that offer). The monthly mortgage payment would be about $2,950.
It costs $15,600 more each year to a homebuyer today than it cost me to buy it 15 years ago. Incomes are relatively flat over that same time period.
Here’s the reality. If you have lived in the same home for 10+ years right now, you likely couldn’t afford to live in your same community today. That means your kids…. When they start their families…. They can’t come home. They can’t afford it.
There are thousands of really smart people trying to solve this problem right now around the country. Real estate ownership is the fastest way to building long term wealth. Everyone deserves that opportunity. The solutions probably won’t look like a 21 year old buying a brand new 2,150 sq. ft. house. Housing is going to have to look different than generations of the past have grown accustomed to. We need to collectively recognize this shift rather than bury our heads in the sand. Townhomes, garden homes, patio homes, duplexes, quadplexes, condos, multi family homes, accessory dwelling units, and traditional single family homes are all housing options that we must embrace as reasonable places for people of different life stages to lay their head down each night. The long term path we’re on right now is financially catastrophic to our kids. There are solutions, but we have to change.