Refinance Mortgage HQ » Mortgages

How does Overtime Effect my Loan Potential?

Andy — Thu, 16 Jul 2009 23:03:54 +0000

The most common myth is that people believe overtime can increase the amount of money that a lender is willing to loan you. This is both true and false because in order for overtime to count, there has to be certain criteria’s that you need to meet. If a person has been doing overtime for the last few months just to increase the amount of income they make per month, they most likely believe that they can show that as their gross monthly income, and expect lenders to give them a higher loan. The only problem is that lenders need to see consistency in this overtime. Meaning that a person who uses overtime in their overall income, needs to obtain overtime for at least a year or two, consistently, rather than on and off. The reason being is that lenders want to count the income that is stable, rather than income that can change over time. When jobs are seasonal and business is slow, there may be no overtime and that lowers your income even though you put down you had a higher income, which increase your loan and payments. Without that extra overtime income, you have a possibility of falling behind on your income, so most lenders like to disregard overtime unless it’s consistent.

When overtime is used correctly, it can help you obtain a higher. For example, you make $800 a week, by calculating your debt ratio and using a 28% front end ratio, over a 30 year fixed rate of 7%, you are qualified for a loan of $123,000. Now if you have overtime on this, let’s say around $300 more, you can calculate your debt ratio with the same factors, and you are qualified for a loan of $170,000. Overtime does help with the loan, as you can see, but the only problem is that the overtime has to be consistent.

If you wish to include your overtime in your income when applying a loan, your loan officer will need to match up your W-2 forms to make sure that the overtime is consistent. Also they may have your boss vouch that you have done consistent overtime, and that in the future you will have the opportunity to continue overtime.

Documenting Income

Andy — Thu, 16 Jul 2009 22:40:12 +0000

Documenting Income depends on different things such as how you’re employed and what kind of job you have. The determining factors are how you’re paid and the type of employment you have will be important to what type of documentation you will need to provide to the lender. Another thing that is important is how much you’re trying to get approved for. If you’re asking for a very high loan compared to a more moderate one, lenders will need to have more information about your employment status. To avoid wasting time and effort, be aware of what you need to give to your lender. You won’t have to fuss with getting the right forms done and doing things that may be unnecessary.

When applying for a mortgage, try to anticipate what you need to do. Anticipating will only help you in the future, because you’ll have less work to do. You can’t be so optimistic about your loan, try and understand the possible down sides to what could happen, to prepare yourself for any unexpected setbacks.

Once again, depending on your employment your documentation will be different. The reason they ask for documentation is simply because they need proof of your income, so when they give you a loan they are at least comfortable, knowing that you have the money to make the payments. For jobs that have different income sources such as those that are “off the books” or those that are not factored into your total monthly gross income, you will need a third party to verify your earnings. This can be done through a boss or an accountant with the company, or someone who can vouch for your earnings.

To prepare yourself for applying for a mortgage to obtain your new home, some things that the lenders may need will be your most recent W-2 forms, documentation of your bank and retirement statements, and any other source of accessible income.

Calculating Debt Ratios

Andy — Wed, 15 Jul 2009 22:48:19 +0000

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.

Escrow Account For Mortgage Loans

Andy — Wed, 15 Jul 2009 01:42:00 +0000

Mortgage loans with less than 20 percent down potentially have a higher risk of default than loans with more than 20 percent down. Loans that have escrow accounts are less likely to default. Less money down would mean a higher risk for lenders. With an escrow account, some of that risk is compensated and the lender is insured that the borrower will pay for their property taxes.

Every one or two years, the county collects property taxes and since you have an escrow account, your property taxes are automatically paid by your lender. The escrow account works like a piggy bank. You put in money every now and then, little by little. Then when you need the money, it’s already saved up and ready to pay the taxes.

Mortgage lenders are very nervous when you have less than 20 percent down. They do not want to worry about you paying your taxes on time. This is because if the taxes are not paid, tax lien wills emerge under your title and your home can be sold out under your lender if the tax lien drags on. An escrow account is an extra insurance for the lenders.

Lenders sometime even pay you to get an escrow account even when it’s not required. This is called an “escrow waiver” fee. When borrowers have more than 20 percent down, lenders will usually give them a ¼ point discount if they set up an escrow account. On the other hand, if you refuse, the lender will charge you an extra ¼ point.

Federal law requires that when an escrow account is set up, not more than two months of property taxes plus fifty dollars could be in the account. This is called the “cushion,” in case property taxes increase.

Your local appraisal district will determine your property taxes. By the way, if your home is newly built, then the valuation may be done when it was just raw land. If so, your property taxes would need to be updated because the taxes will be for the improved value, not just the land.

Are escrow accounts good or bad? It is neither, but mortgage lenders love them. It gives them extra insurance that would allow them to be more care free. It is really a personal opinion. If you like to invest then you probably would not be content to have an escrow account that would lock up some fund. But if you like to save up for your property taxes then an escrow account is the way to go.