February 2008
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In this Issue:
Can You Really Afford That Mortgage?
(Please leave us a comment at the bottom of the newsletter.)
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Can You Really Afford That Mortgage?
Many people try to "cheat the system" to get loans approved, not necessarily in the illegal sense, but they fudge the numbers a little, or find a snaky broker to push something through they may not be able to afford. Keep in mind these safeguards are there for a reason. Sure, companies don't want to lose their money, but when they tell you no, they're also protecting you.
Good lending institutions employ underwriters to handle their loans. Underwriters evaluate the risk involved with lending you money. Essentially they tell the lender whether or not it's a good idea to lend you money. Don't take it personal, it's a very exact method to determine the amount of risk involved. Without underwriters, lenders wouldn't be able to stay in business long enough to help you.
Two institutions, FHLMC(Freddie Mac) and FNMA (Fannie Mae) set the guidelines for most lenders. Lenders sell their loans on secondary mortgage markets to these institutions, who then resell the loans to investors, insurance companies, and banks. Lenders who keep their loans, or "Portfolio Lenders" have more flexible standards, and don't neccessarily comply with Freddie or Fannie's standards. Don't stop at just one. Shop around.
They put you under the microscope to evaluate the risks involved. The first step is obtaining a credit report (something you should do first). So what are they really looking for?
1. Integrity - Obviously they want to know: do you pay your bills on time? Have you paid late? Have you defaulted? Chances are if you don't treat your other obligations with respect, you might not hold your word on this mortgage loan either.
2. Your Job - Your income and job stability are very important. Are you a seasonal worker? Are you in an industry or at a company that is circling the drain? These factors are examined, because without a job, you can't pay back your loan. Income is large consideration here. Which ties in with:
3. Debt to income ratio - Again, can you really afford this loan? Are you already over your head? They want to know. DTI is determined by comparing your income to your homeowner expenses.
4. Property value - They want to make sure you aren't buying junk property. This is what your loan is backed by, and if you bail out, they don't want to be stuck with overvalued junk. Which ties in with:
5. Loan to value ratio - This is another simple formula, how much are you borrowing compared to how much the property is worth? This is why the bigger the down payment, the better your chances are of getting approved. When you minimize LTV, you improve your risk rating.
6. Savings - How much have you saved? Do you have any liquid assets, stocks or bonds? Lenders like to see a 4-6 month reserve, in case of emergencies. But you can get away with a 3-4 month reserve if you put down more money. A low LTV will lessen the need for a higher cash or asset reserve.
So these are the things underwriters are looking for when they consider the risk involved with lending you money. It's not a mysterious method, or one that discriminates against you, it's simply based on numbers, and your ability to pay, and likelihood of sticking it out. Remember, people get laid off, kids get sick, and unexpected situations arise. Don't put yourself so close to the edge that one of these conditions prevents you from making payments. Be honest, and don't try to make things up that might give you an edge, because you just may find that you really can't afford that loan, and you'll end up hurting in the end when you foreclose.
Things to Consider BEFORE House Hunting
Before you start house-hunting there are certain things you need to consider. Selling your old house might be one of them. But, there are other things you might not think of, at least not right away.
Know what you can afford: There is often a big difference between what you wish you could afford and what you can really afford. This needs to be
Know where you want to live: Obviously, this is something you need to decide on before you even move: spontaneity and relocation don't exactly go hand in hand. But, knowing where you want to live isn't limited to a state or city. Research neighborhoods, communities, job opportunities, and school districts and find a few areas where you could see yourself and, more importantly, areas where you wouldn't want to live.
Have a wish list: We all have an ideal home in mind. Unfortunately, not all of us have the financial means to make this ideal home a reality. Nevertheless, that doesn't mean the dream is over. Instead of giving up things you want, make a wish list. Perhaps you would love a sun room or have always wanted a big backyard. Maybe you want a finished basement or a hot tub. Making a wish list can help at least some of your wishes come true.
Know what you are willing to do without: After you've made your wish list, a time will come when you must decide what you can do without. You may think you absolutely have to have a gigantic master bedroom, but when that gigantic master bedroom comes with a ridiculously high price tag, you may find that a smaller bedroom will suffice. Still, there might be things you aren't willing to compromise on. If you've got five children and must have a large backyard for their swing set, their trampoline, and their soccer goals, then don't be too quick to remove your desires here. If something is that important, keep on looking for it.
Know your rights: Unless you are a one man show - financing a move, and looking for a house entirely on your own - other people are going to be involved: realtors, loan officers, home inspectors, professional movers. Whenever others are involved, there is always a chance you may be charged more for something than you should. Before your housing search begins, know your rights. Know how to tell when a home loan interest rate is much too high, know what to expect from your realtor and know what to do when the moving van with all of your precious possessions takes a wrong turn and ends up in another state.
Home Maintenance for February
February
Examine bathroom and kitchen caulking. If you find gaps between the tub or shower and the floor and walls, or between the countertop and backsplash, re-caulk.
Check under sinks and around toilets and showers for signs of leaks. Also repair dripping faucets — if you don't know how, a local handyman may do the job at about half the price of a plumber. Save plumbers for bigger, more complex jobs.
Call to have your central air-conditioning serviced. Set up the appointment now for March or April to avoid the summer rush. The service will make sure your compressor and air handler are working well and that the condensate drain is clear.
Check back next month for your Maintenance Tip for March.
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Remember all those crazy adjustable mortgage rate deals a few years ago? Many excited young couples jumped on to the ARM bandwagon, enticed by low rates and less money down. Now the repeating daily news is "foreclosure". With so many people bailing out, you just might find a good deal out there. But are you going to get in the same trap they did?
determined before you even begin your housing search. Make a budget and figure out what you can pay on a monthly basis (don't forget to add in things like utilities and Home Owner Association dues). Knowing what you can afford helps assure your search won't be futile: you don't want to spend three weeks looking at houses that are simply outside of your realistic budget.
Last month we gave you an entire year's worth of tips from The Weather Channel's home improvement expert Danny Lipford, that not only reminds you of what needs to be done and when, but also shows you ways to save money. We'll bring you each individual month's tip again here as a reminder.
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