Loan Process

Before we get started this week, I am going to give you a few organization tips for you finances to help in the loan process.

Here are three key items to consider that will help you begin to organize your financial life so you can see what it will take to qualify for your next home purchase or refinance.

1. Income

• How are you paid? -- Salary (W-2 wage earner), Commissions, Bonuses, Independent Contractor (1099-R), Cash.
• What is your monthly income? -- Once you find out how much you make, there are two things to consider your Gross Income (before taxes) and Net Income (after taxes - what you actually take home)

2. Debt

Three main types of debt -- Mortgage, Installment, and Revolving.

• Mortgage - Amount you owe against a property...can be primary residence, second home, or investment property.
• Installment - Usually a loan in connection with a car and the amount due each month.
• Revolving - Debt associated with credit cards.

3. Assets

• How much do you have in your savings account?
• Do you have any other liquid assets? - Cash that you is easily accessible.

From there you can deduct a couple very important items for what you can qualify for in a purchase and what type of products may be available to you. To find out your Debt-to-Income ratio, first add up all your debt (mortgage, revolving, installment) and divide it by your gross income.

*For example - ($25 C/C, $325 I, $125 C/C, proposed mortgage $1375 / $5500 Income) = 33.6% DTI back end ratio.

There are two ratios - Front End and Back End. The front end ratio is your mortgage debt vs. income and the back end encompasses all debt (see example above) vs. income. Typical DTI ratios are 33%/45%. You can usually qualify for higher ratios, i.e. 43/55 but the higher the ratios the harder it may become to fit the loan.

Lastly, what amount do you have in reserves? In this market, you can expect to put at least 5% down on any purchase of a primary residence. Due to the distress market label (see article from Tuesday, February 26) even the flex products and "My Community" mortgages are requiring a cash contribution. On a $220K purchase price you can expect to need at least $11k in cash to bring into the deal.

Hopefully, this will get you started with finding out how to set your dreams for achieving that home purchase. It is always good to evaluate your current financial situation and discover what it will take to accomplish your goal of home ownership. Please email me or comment on this blog if you have any questions.