Calculate Your Income vs. Debt…Buyers Basics

Most lenders don’t want you to take out a loan that will overload your ability to repay

By John Adams

As you think about applying for a home loan, you need to consider your personal finances. How much you earn versus how much you owe will likely determine how much a lender will allow you to borrow.

First, determine your gross monthly income. This will include any regular and recurring income that you can document. Unfortunately, if you can’t document the income or it doesn’t show up on your tax return, then you can’t use it to qualify for a loan. However, you can use unearned sources of income such as alimony or lottery payoffs. And if you own income-producing assets such as real estate or stocks, the income from those can be estimated and used in this calculation. If you have questions about your specific situation, any good loan officer can review the rules.

Next, calculate your monthly debt load. This includes all monthly debt obligations like credit cards, installment loans, car loans, personal debts or any other ongoing monthly obligation like alimony or child support. If it is revolving debt like a credit card, use the minimum monthly payment for this calculation. If it is installment debt, use the current monthly payment to calculate your debt load. And you don’t have to consider a debt at all if it is scheduled to be paid off in less than six months. Add all this up and it is a figure we’ll call your monthly debt service.

In a nutshell, most lenders don’t want you to take out a loan that will overload your ability to repay everybody you owe. Although every lender has slightly different formulas, here is a rough idea of how they look at the numbers.

Typically, your monthly housing expense, including monthly payments for taxes and insurance, should not exceed about 28% of your gross monthly income. If you don’t know what your tax and insurance expense will be, you can estimate that about 15% of your payment will go toward this expense. The remainder can be used for principal and interest repayment.

In addition, your proposed monthly housing expense and your total monthly debt service combined cannot exceed about 36% of your gross monthly income. If it does, your application may exceed the lender’s underwriting guidelines and your loan may not be approved.

Depending on your individual situation, there may be more or less flexibility in the 28% and 36% guidelines. For example, if you are able to buy the home while borrowing less than 80% of the home’s value by making a large cash down payment, the qualifying ratios become less critical. Likewise, if Bill Gates or a rich uncle is willing to cosign on the loan with you, lenders will be much less focused on the guidelines discussed here.

Remember that there are hundreds of loan programs available in today’s lending market and every one of them has different guidelines. So don’t be discouraged if your dream home seems out of reach.

In addition, there are a number of factors within your control which affect your monthly payment. For example, you might choose to apply for an adjustable rate loan which has a lower initial payment than a fixed rate program. Likewise, a larger down payment has the effect of lowering your projected monthly payment.

Just plan on contacting and investigating a number of lenders to find a loan program that meets your needs.

Copyright © by Move, Inc.

Are You Ready to Sell Your Home?

(via freshome.com)

Selling your home is a big decision.  The unstable housing market has made home sellers apprehensive about putting their home on the market. Rightfully so, selling your house involves research, preparation, and especially patience.  On the bright side, this is the best time to buy a home.  Houses are at historical lows and now could be the perfect time to sell your home.  Let’s decide if you’re ready to enter the housing market.

DO YOUR HOMEWORK: If you are thinking about putting your home on the market, research what home’s are for sale, and have sold within a set radius distance from your home. The radius from your home is based on if you live in an urban or rural area. In urban areas, there are more comparable homes in a smaller distance and conversely in rural areas. Research homes which are similar in size, age, and amenities as your own home. This step will help you get realistic about your decision in selling your home.

HIRE AN APPRAISER: The purpose of an appraiser is to professionally analyze your home, and compare it to the recent sales and the current competition.  This step is important in deciding if you’re ready to sell your home.  The price figure that the appraiser assesses your home at should be the amount that you now use for your planning.  Although appraising can be subjective to the professional, banks will use this to determine financing limits.  Therefore, the appraiser’s report should be considered heavily.

WEIGH THE PROS AND CONS: Selling your home is a personal decision.  After you have the professional appraiser’s price, determine if this is realistic for your situation. Is the time and money that you spent in your home worth the amount that you may lose or gain in selling it? Remember, your asking price should be thought through carefully.  Ultimately, the home buyer can still offer a different amount, and you will need to decide if you’re ready for the give and take of home selling.

PATIENCE: Home selling requires the endurance and patience to go through the process. Several offers could be made on your home; this doesn’t always mean they are reasonable for your situation.  There isn’t any guarantee that you will sell your home for what you ask for it. Conversely, if you live in a highly sought after neighborhood, or area of town, you may receive more than your asking price! Be patient, the market has quite a few properties. This means the offers you receive may ‘lowball’ you – meaning, offering much less than your asking price. Consider all offers carefully, if you are in a desperate situation the low offers may be your only way out.  If you don’t have a strict timeline, be patient and the right offer for your home will eventually come.

Your home may be the most expensive possession you’ll ever own.  Your family and where you live can also be the most important decision for the happiness of your family.  Determine if you are ready to sell your home now, or if you need to wait. Whichever you decide, arm yourself with information and if it feels overwhelming, seek guidance from a Realtor.  Their job is to help you through the home selling process from beginning to end.

Credit Bureaus – What You Need To Know

(via streetdirectory.com)

• Identity information such as your name, address, social security number, spouse and date of birth.
• Payment habits such as how promptly you have made payments to previous creditors.
• Public records such as records of arrests, indictments, convictions, lawsuits, tax liens, marriage, bankruptcies, and court judgments.
• Debts.
• Other relevant credit data Information concerning your current employment such as the position you hold, length of your employment, and possibly your income.
• Information about your personal history such as the number of dependents you have, your previous addresses and information about your previous employment.

Credit bureaus sell credit reports to credit grantors, such as banks, finance companies, and retailers. Credit grantors use credit reports to determine whether or not a potential borrower is creditworthy.

There are three major credit bureaus in the United States:

Equifax: 800-685-1111 website: www.equifax.com

Experian: 888-397-3742 website www.experian.com

Trans Union: 800-916-8800 website: www.transunion.com

These three bureaus provide nationwide coverage of consumer credit information. The credit bureaus are a for-profit system that generates billions of dollars in revenue each year from selling copies of credit reports to creditors and mailing lists. Trans Union made 1.5 BILLION dollars last year.

It is essential to understand that Credit Bureaus are nothing more than record keepers. Simply put, they keep a record of who has given you credit, when they gave you credit, how much credit you are given and whether or not you paid it back on time. When you want to obtain credit cards, loans, financing for a car or home, leases, apartments and sometimes even employment, the lender or bank will check your credit to see your financial history.

Credit Bureaus are paid by the people who request your credit file. Credit Bureaus are not run by banks, police, or government and they have no legal power over you. So don’t be intimidated by them.

They are the Credit Bureaus because they own large computer systems capable of storing credit information on everyone in the United States. However, because of the tremendous amounts of information on their computers, their method of storing information is very basic and contains numerous errors.

Since the bureaus have made so many errors in the past, all Federal Laws regarding credit information is very much in your favor.

How do the credit bureaus obtain information?

Credit bureaus obtain identification and credit information from credit grantors, such as banks, retailers, and collection agencies. Bureaus obtain monetary-related public record information directly from the court systems.

How long do the credit bureaus keep my credit information?

The credit bureaus keep your personal credit history for a period of approximately ten years.

– Closed or Inactive Accounts – 10 years from the date of last activity.

– Derogatory Accounts – 7 years from the date of original delinquency.

– Public Records – 7 years from the date of payment or indefinitely if the Public Record is an unpaid tax lien.

– Chapter 7 Bankruptcies – 10 years from date filed.

There is no time limit on reporting: information about criminal convictions; information reported in response to your application for a job that pays more than $75,000 a year; and information reported because you’ve applied for more than $150,000 worth of credit or life insurance.

What are the laws governing credit bureaus?

Congress passed the Fair Credit Reporting Act (FCRA) in 1972 to curb the abuses of the credit reporting bureaus. The FCRA is the governing federal law on the issue of credit reporting. The Fair Credit Reporting Act helps consumers promote and use their right to make changes to credit reports. It is a requirement, under section 1681e, that:

(b) Whenever a consumer reporting agency prepares a consumer report, it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates. Further, the FCRA provides a procedure in case of disputed accuracy, under section 1681 i whereby a consumer can demand that an investigation be made into the completeness or accuracy of any information in a credit report. If the status of the information cannot be determined, the data must be removed or corrected. The FCRA states:

(a) If the completeness or accuracy of any item of information contained in his file is disputed by a consumer, and such dispute is directly conveyed to the consumer reporting agency by the consumer, the consumer reporting agency shall within a reasonable period of time reinvestigate and record the current status of that information unless it has reasonable grounds to believe that the dispute by the consumer is frivolous or irrelevant. If after such reinvestigation such information is found to be inaccurate or can no longer be verified, the consumer reporting agency shall promptly delete such information. The presence of contradictory information in the consumer’s file does not in and of itself constitute reasonable grounds for believing the  dispute is frivolous or irrelevant.

How do errors occur and how frequently?

Depending on the source of your statistics, estimates of credit bureaus errors run as high 90%. The Attorney General of New York State has estimated that credit bureau errors are in at least one-third of all reports, the United States Congress has estimated that errors exist in at least one half of all reports, a Consumers Union study found errors in 40% of credit files and the Charles Givens Organization conducted a study in which 90% of the credit reports reviewed contained errors.

You have the right under the FCRA to remedy all file information that is irrelevant,  not properly utilized, inaccurate, incomplete, misleading or does not reflect your creditworthiness, credit standing or credit capacity.

REMEMBER: THE PRACTICE OF CHALLENGING CREDIT DATA AND SECURING CREDITOR-BASED TRADE LINE DELETIONS ARE WHOLLY WITHIN THE PURVIEW OF THE LAW AND ARE THE RIGHTS OF ALL CONSUMERS.