Monthly Archives: July 2009

Documenting Assets

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Lenders prefer to see that the home buyer has a habit of saving money or can potentially use their assets as future income. To document assets, the lender will most likely ask the home buyer to provide three of their most recent statements, a recent quarterly or annual statement. These documents will present the lender with information about the home buyer’s saving patterns. It will also help to establish whether or not the asset is visible. Lenders prefer to see that the potential home buyer saved their money for the purchase instead of it being borrowed. By borrowing, the lender has reason to suspect that others may have had prior interest of that property. This is called a lien, which is more clearly defined as a legal claim on a property making it collateral against monies or services owed to another person or entity.

It is important to be sure that the home buyer does not deposit a large sum prior to purchasing the home. If a large sum is, in fact, deposited he or she must be able to explain where the money originated from. The lender will use the recent statements that the home buyer provided to observe the mean balance over an unmitigated amount of time. The lender must examine the average bank deposits from the most recent statements; if he or she notices an irregular amount that is deposited then he or she must be sure of where that money came from before approving the loan. Without a proper response from the home buyer, the lender will most likely not continue on to approve the loan. The issue also deals with responsibility. The lender has reason to disapprove the home buyer’s loan if the large sum came from an illegitimate or unknown source because the loan might not be in responsible hands.

Calculating Debt Ratios

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Calculating your debt ratio is pretty simple. It’s nice to know it because if you’re buying a home, or plan to in the near future, you can roughly figure out how much a potetnial lender will be willing to let you borrow.

Your debt ratio is represented as two numbers, based on your gorss montly income. The two numbers consist of your housing ratio which is your housing payments that include tax and insurance costs, which is also known as the front end. The back end would be your second ratio also known as your total debt. This is calculated by your housing ratio added with your debt on bills and credit reports divided by your gross monthly income.

An example would be of a loan with 5% down and some common front and back end ratios would be 28 and 36. Your gross monthly income is 5,000 dollars which is what you make before taxes and any witholding that might concur. We will use the housing ratio of 28% and thus 28% of our gross monthly income will be $1,400. You subtract various things that are considered your “allowables” which can be insurance bill and monthly tax payments. So for this example we will be left with $1,115 for our principal payment and interest payment. For a 30 year fixed payment with a 7% rate, the loan amount will calculate to roughly 168,000. This is what you’re preqaulified for, so expect to get atleast this much when you’re seeing your lender.

To calculate your back end ratio, it shows items that are on your credit reposts such as any loans, such as car, and student, and credit card payments. Lets say that for all our loans and payments combined equal $650, our debt would be the $1,400 plus the $650 which would give us $2,050. When we divide this by our gross monthly income, we get roughly 41% which would make our ratio 28 to 41, for front and back end ratios respectively.

As said earlier, you may be preqaulified for a loan of $168,000, this isn’t necessarily a bad thing. This does not limit your home to one that cost within that range, you can still afford a house that may cost double or even ten times that, but then you’re going to need the rest as a down payment. So, it may not be realistic, but be aware that your options are not limited.

How Lenders Examine Assets of the Potential Home Buyer

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Quite often, first time home buyers share their savings accounts or money market accounts with their parents. Even if the name of the potential home buyer is on the statement, it does not necessarily mean that he or she has full access to or possession of the account. The lender will split the asset between the home buyer and the parent who shares the account. So, if there is $12,000 in the account, the lender will only account credit for $6,000 of that. A quick fix is to have the parent write a note stating that the account will be turned over to the potential home buyer. Any assets that are listed must be in full possession of the home buyer.

Another concern is that some home buyers do not pay attention to how liquid their assets are. This means that even though an account is present, such as a retirement account, the home buyer may not have access to it. A retirement account will have no value until one is retired. For the purpose of financing, the home buyer may cash that account. Another option is to allow the lender to use a partial amount that can be included in the assets.

Although some types of accounts will let the owner cash in, it is for a penalty. For example, the home buyer has $50,000 in his or her retirement account and wishes to cash in. The lender will consider the penalty of this action; let’s say, 10%, and deduct that from the account. So in actuality, the account is only worth $45,000. It is suggested that the home buyer talk to a financial planner about this decision. If the home buyer does not decide to cash in their account then that asset can still be used to qualify them for a home loan. The lender will most likely use 70% of the home buyer’s vested balance. The vested balance is the portion of the 401k that one is currently entitled to.

The very last asset requirement for loans is called reserves. The reserves are the funds that are there when the home buyer closes his or her purchase. It is usually in multiples of the house payment. Retirement accounts by itself can be used as reserve assets.

Prequalified Mortgage

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Being prequalified for a mortgage means nothing more than that you are a good lead. A loan officer will indicate to others involved in the loan process that they have spoken to you in regards to your current assets and liabilities, income and debts to see if you qualify for the mortgage loan amount you are seeking.

Being prequalified means absolutely nothing to securing the final loan until all sources of income are verified. Consider this as fancy speak that you are not wasting their time by being prequalified as a potential home owner.