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Getting Prepared                           

The hardest part might seem like there are endless requests for personal records, but it's really not that bad. The very best thing you can do is plan ahead. Planning ahead starts with the commitment to get organized. Numerous times I have met folks that don't keep bank statements, paycheck stubs, credit card statements or anything they get in the mail after it has served its purpose. I have even met some that didn't keep their tax returns. That might be OK if you're not planning on buying a house.

I heard a loan officer in my old office tell a customer once "step back and take a look at your financial picture". At the time I thought he was the type that moved his lips so he could hear himself speak. Looking back, that might be the most accurate statement you could make to someone buying a home without any pre-knowledge of all the ins and outs of the actual process. Back then I would have made a list, gave it to the customer and sent them off to retrieve whatever it was I asked for. But let's face facts. This is a huge undertaking and can be the best or the worst experience depending on how you plan for it. The stress will get you out of the mood fast. I say eliminate the stress and let's see what we can do in advance to make the whole conquest easier.

If you are planning to buy a house in the next several months, at least do this. Go to your nearest office supply outlet and buy some supplies. Get some pens, a few legal pads, folders, big envelopes and multi colored files. You might even want to pick up an extra calculator. In the files, separate all your stuff. Put bank statements in one of the colored files. Put them in order and label the file. Example: Dodge City Bank checking November 06 through February 08. Write the account number underneath the heading. You don't have to do this precisely as described, but do you get the picture? Do the same with your tax returns. Pile a folder full of paychecks. Be sure to keep all the pages and schedules to you statements and tax returns. It'll pay off later.

Take one of the legal pads and write down some notes. You may want to write down some questions that you have so you can ask your loan person or your real estate agent. Brainstorm with your spouse or partner and write down whatever it is you want to know. Write down your plans for home shopping if that's what you want to do. Jot down some phone numbers. Now is the time to put pen to paper.

 

Ordinarily, the needed stuff will include the following:

Bank statements (at least two months)
Statements for retirement accounts
Two years tax returns (most recent)
W2s for two years (both borrowers if applicable)
Two paycheck stubs or copies of auto deposit advice (per borrower)
Copy of Texas Driver's License (homeland security as you know...)

But the list might include these due to special circumstances:

Divorce decree(s) for proof of child support or to be un attached to ex spouse's debt
Documentation for social security income
Retirement savings

If you're a landlord or you are self employed:

Corporate and/or business returns
Statements from brokerage accounts for assets to be considered reserves
Lease contracts to tenants

Let’s talk about your budget. Take another one of those legal pads and use it to list all your monthly payments you are currently making. List them in columns with balances and monthly payments. For the purpose of this task, include daycare, car insurance, groceries, utilities, cell phones and whatever else you can think of. Be as thorough as possible and don't leave out anything.

Total up all your monthly payments and underline the total.

Now. Add up all your income BEFORE taxes are taken out. This is commonly referred to as "gross income". Be sure to include child support and any other monthly payments made to you by others like social security or anything similar. Total up your income and underline it. Now here’s the formula to see what financial shape you are in. Are you ready?

Total monthly payments DIVIDED BY total monthly income (gross monthly income).

Here’s an example: let’s say you have a total of 2700.00 in monthly payments that includes your car and your wife's car along with rent, insurance and food. OK? Now, take your total income (before taxes). Let's say its 6100.00 between you and your wife or partner. Good! Let’s do the math.

2700.00 divided by 6100.00 = .44 OR 44%

The 44% represents your debt to income ratio. This number is acceptable in most cases. 50% would be right on the border line and above that would be too high. The 44% means you spend 44% of your income to live.

But it gets better from here! When you get qualified at a mortgage company, we don't count car insurance, day care and food. We only count credit cards, car payments, any loans that are paid monthly and for the sake of qualifying you for a mortgage payment, rent. We call them your "liabilities". We'll exclude all those things and maybe our total liabilities will turn out to be 1900.00. Let's do the calculation again.

1900.00 divided by 6100.00 = .31 or 31%

This gives us a clearer picture as to what you can afford mortgage payment wise. This could also be a pitfall. That's why it's so important to determine for yourself what your total cash outlay is every month. And here’s why: your new payment will most definitely consider the rent you are paying now. What I mean is, you are paying a chunk for rent already. However, your mortgage payment will include taxes and insurance (I'll get into taxes and insurance later). If your rent is 1000.00 a month and you're looking at a house that costs at least 150,000.00 then you'll have to look long and hard at the numbers. Let’s look at a possible mortgage payment:

Sales price is 150,000.00 minus a down payment (5% for an estimate).

Loan amount is 142,500.00. Principle and interest at 6.25% for 30 years = 877.40

Add Taxes and insurance 250.00 and 80.00 (a random guess) = 330.00

Add in mortgage insurance (I'll explain later) = 65.00

Total monthly payment = 1272.40

Before, your rent was 1000.00 per month and now you are at 1272.40.

Now is the time to make marks and notes on the legal pad and look closely. What can you afford every month?

So now you know a little about income and liabilities. I failed to mention your income before taxes are taken is considered, but only for qualification purposes. As it's been pointed out to me many times before, the actual take home pay is considerably less. Maybe not in all cases, but you may want to look at that.

What about assets? The lender considers any type of savings assets. Liquid assets are those you can spend. Most retirement assets are just considered as reserves. Not all of them as some of those retirement savings you can't touch until the timer goes off unless you want to give up a chunk of it to the tax guy. Besides, you need to show where the cash down payment is going to come from. Even if you qualify and don't put anything down, you still have to pay taxes and insurance up front along with your share of the closing costs.

Threre's more to consider and more to learn. I will explain more as we go along. The other topics will guide you further. Don't give up or get discouraged. We all have had to go through the process. The first time is the most cumbersome and frustrating, but any time afterwards is a breeze.

Remember, if you have any questions, big, small or tall, you can always write me and I'll respond to you in a more than timely manner.

Vinni

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