AFFORDABILITY 101

Affordability 101

If you earn $56,516, the average household income, you can afford $1,695 in total monthly payments, according to the 36% rule. The rule, which measures your debt relative to your income, is used by lenders to evaluate how much you can afford.

Key factors in calculating affordability are 1) your monthly income; 2) available funds to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.

  • Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
  • Funds available – This is the amount of cash you have available to put down and to cover closing costs. You can use your savings, investments or other sources.
  • Debt and expenses – It’s important to take into consideration other monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
  • Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and what interest rate you’ll be charged. Check your credit score.

We’ll provide you with an appropriate price range based on your situation. Most importantly, we’ll take into account all your monthly obligations to determine if a home is comfortably within reach.

PRO TIP:
It’s also important to plan for the future. Consider creating a savings plan for upcoming life events, such as having a child.

For more information about home affordability, read about the total costs to consider when buying a home.

When banks evaluate your affordability, they only take into account your outstanding debts. They do not take into consideration if you want to set aside $250 every month for your retirement or if you’re expecting a baby and want to set aside additional funds. NerdWallet’s Affordability Calculator helps you easily understand how taking on a mortgage debt will affect your expenses and savings.

Questions to ask Loan Officer

Hi {LEAD_NAME} –

The mortgage loan process can be very confusing and stressful, so {I_WE_LC} thought {I_WE_LC} might take this opportunity to share some good questions to discuss with your lender when applying for a home loan:

 

  1. What kind of fixed-rate and adjustable mortgage loans available?
  2. How long can I “lock-in” the financing at the current interest rate and what is the lock-in policy?
  3. Is a float down lock available in case rates drop after I have locked-in?
  4. What are the other fees a lender may charge me in conjunction with my loan?
  5. Are funds for a second mortgage available?
  6. Is there a pre-payment penalty clause? This involves extra charges for paying off the loan before maturity. About 80% of all mortgage loans are paid off early.
  7. What is the “grace” period?
  8. How late can a monthly payment be made before a late charge is assessed?
  9. What will happen if a payment is missed?
  10. If you sell your house, will the new buyer (if he/she qualifies) be able to assume your mortgage at the same interest rate?
  11. Do you have to pay “points” to get your new mortgage? Usually lenders charge points for the cost of giving you a mortgage loan. A “point” is 1% of the loan.
  12. Will the lender require mortgage insurance?
  13. Is the loan serviced locally or is the servicing sold?
  14. What will the total closing costs be?

 

Questions on adjustable rate mortgages:

  1. How often will the interest rate be adjusted?
  2. Is there a maximum limit on each rate change?
  3. How often will the monthly payment be adjusted?
  4. Is there a ceiling on payment adjustments?
  5. Can the term of the loan be extended?
  6. What is the maximum rate that can be charged over the life of the loan?
  7. Is there any potential for negative amortization?
  8. What is the annual percentage rate?

Sincerely,

Jaclyn Nelson

516-757-8585

What to Know About Your Credit Before Buying a Home

It’s not just whether you pay your bills on time that matters

 

this article was contributed by financial expert and blogger Mary Beth Storjohann, CFP, author, speaker, and founder of Workable Wealth. She provides financial coaching for individuals and couples in their 20s to 40s across the country, helping them make smart, educated choices with their money.

Like it or not, your credit score is one of the most important numbers in your life, ranking up there with your Social Security number, date of birth, and wedding anniversary. This three-digit number is your financial report card, except there’s no getting rid of it after college.

Your credit score shows lenders just how trustworthy you are when it comes to managing your finances, and it can either save or cost you thousands of dollars throughout your life.

If you’re in the dark about just how significantly this number can impact you and the details behind your personal score, here’s an overview of what you need to know before hitting the mortgage application process.

How Your Score is Calculated

Your FICO credit score is comprised of five elements, according to the Fair, Isaac Corp.

  1. 35% of your score is attributed to how you pay your bills. Points are added for paying on time and deducted for late or missing payments. Note: This is a big portion of your score, so if you’re not paying bills on time, it’s best to get that under control pronto.
  2. 30% of your score is based on your credit utilization ratio. Translation: How much money do you owe as a portion of the amount of credit available to you? The lower this ratio, the better.
  3. 15% is based on the length of your credit history. When did you open your first account (and is it still open)?
  4. 10% of your score goes to the type of credit you have. Think revolving credit (such as credit cards) and installment credit (such as car loans and mortgages).
  5. The last 10% is impacted by new credit applications. How often and for what types of credit are you applying?

Where to Find Your Score and Report

To access your credit report, use a website such as annualcreditreport.com, which will give you one free report a year, or creditkarma.com, which will provide you with free access to your score upon signing up for an account.

Once you have copies of your report and score, immediately look for fraudulent or erroneous information. If you find anything, immediately contact both the credit reporting agency and the company that is portraying inaccurate information to determine next steps.

How Your Score Can Cost You

Your score can range from about 300 to 850. You’ll find a variety of breakdowns on what’s considered “good” compared to “excellent” versus “poor,” but in general you’ll want to aim for a score of 720 and higher, which is the “excellent” range.

The higher your credit score, the more creditworthy you appear to lenders (meaning they can rely on you to pay your debts and pay them on time), which translates into lower interest rates and more money saved when taking out a loan.

Not sure how this can play out financially? Consider this:

Meet Claire: She’s 35, pays her credit card off in full each month, has all her bills on auto-draft, and never misses a payment. She’s had a positive credit history for 10 years and wants to buy a home. Claire was approved for a $200,000, 30-year fixed-rate loan at 3.75%.

Meet Steve: He’s 32, obtained his first credit card at age 18, ran up some debt in college that he’s still working on paying down, and has no system for keeping track of bills. He has consistent late and bounced check fees. Steve wants to buy a home and was approved for a $200,000, 30-year fixed-rate loan at 5.5%.

What’s all the fuss about if they were both approved? Over the life of her loan, Claire will pay $133,443.23 in interest. Over the life of his loan, Steve will pay $208,808.08 in interest. A small interest rate difference of 1.75% translates into $75,364.85 more paid by Steve! $75,000 is a pretty significant sum of money that could be used toward other goals.

Having a solid credit score is one of the most financially savvy tools for you to have on hand when it comes to buying a home. When managed wisely, your credit score will bring you confidence, peace of mind, and more money saved via low interest rates.

When mismanaged or not cared for at all, your credit score can delay your success in meeting financial goals and result in additional funds and resources spent correcting past mistakes.

Related: 7 Credit Score Myths Even Shrewd Home Buyers Fall For

Mary Beth Storjohann of Workable Wealth

MORE INTop Home Finance Tips from a Top Money Coach

See the full spotlight

 

The Advantage of Getting Pre-Approved


The Advantage of Getting Pre-Approved

August 21, 2017

One of the best things you can do to ensure you get the home you want is to arrange for financing before you go shopping. This is often referred to as getting “pre-approved”.

Getting pre-approved simply means that your lender has calculated how much of a mortgage they’re willing to offer you, depending on your down payment and current financial situation.

There are two advantages to having a pre-approved mortgage. First, you know exactly what you can afford when shopping for a new home. Second, when you make an offer, you’re likely to be taken more seriously.