Economic Worries and Mortgages

One of the most confusing times for everyone in the financial industry is when the economy is seen as fragile. The deficits in the U.S, Britain, Western Europe, and even Canada make investors very nervous. Today, following the economic debate between the U.S political parties on how to manage debt has caused the bond market prices to drop.

Mortgages come from investors wishing to place their money in these markets. If there is concern over the risk, this can or could affect how much money is available. We certainly have seen rates affected, pushing them lower. So we have a conflict; competition for money and rate. This, of course, is a good news bad news scenario. There may be fewer home buyers but rates are lower. Desperate mortgage brokers and agents may try to increase business by lowering rates. This creates frustration throughout the industry when people feel their broker agent is not getting the lowest rates. The problem is that the slightly higher rate can come from the best and most secure lenders who provide great product flexibility.

Rate is not always the solution. When a broker agent buys your rate down, sooner or later they may feel cheated and provide you with poorer service. Beware of low rates for low rate sake.

Long Term Mortgage Thinking

I do know that there is a tendency to think of a house simply as shelter. Given our annual temperature fluctuations, that is a fair comment. Problem is a house is more than shelter. It is an investment that one can add to the enjoyment of our retirement. So when you buy, I want you to think about the next five (5) years or even up to twenty-five (25) years.

When you buy, your income and today’s rate determines what you can afford. Based on these facts, let’s say you can afford to purchase a house for $180,000.00. You put five 5% down. Based on a rate of 3.89%, today your payment would be $875.71 (principle and interest). After five (5) years you could owe $168,397.27.

What happens if rates return to a number closer (to what I would call normal) 5.8%? If rates did rise to this level, your payment would be $1099.41. This is an increase of $223.62 per month. Remember property taxes also tend to rise each year. Do you think your income will support this increase? If not, then plan today to deal with this possibility. Planning for tomorrow is good. Call if you have questions.

How to Qualify for a Mortgage

-A Three Part Tutorial

While getting a mortgage can seem like an overwhelming task, there are a few simple factors to aid in qualifying that if you practice now, will ensure smooth sailing once you decide to purchase your home.  Three main factors are required to qualify for a mortgage:

1. Credit

2. Income to Debt Ratios

3. Net Worth

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Part One: CREDIT  

No active credit means no credit score, which means no normal mortgage.  There are some basic credit requirements to get a mortgage:  First, establish credit (minimum of one year) and prove sound payment history.  Second, seek a credit limit of $2000.00 or more.  If you start with a $500.00 limit, after 6-12 months request to increase the limit.  The lender wants to see if you can handle the temptation of a larger limit; however, the best practice is to stay below 80% of limit and make payments prior to the monthly due date. 

Note: All lenders have individual credit requirements.  Some require three sources of credit to get a mortgage.

In the following days this week I will discuss parts 2 and 3: Income to Debt Ratios and Net Worth. 

Happy house hunting!

Update on Tuesday, November 2, 2010 at 1:02PM by Bryan Slaney

Part Two: INCOME & DEBT RATIOS

There are two different sections within Part Two, Employment Income and Income to Debt Ratios.

Employment Income:

A person must have a steady and reliable income.  Employment and “pension” type income is fine.  The basic rule is that current employment must be a minimum of 1 year (but can be less if a person remains in the same occupation and has passed the employment probation period with current employment.)  Pension is a little different. It is an approved source of income, if it is considered permanent. 

Income to Debt Ratio:

Based on employment income, the amount a person can qualify for depends on income verses current debt, plus what the new mortgage, property taxes and heating will cost.  Ratios must be within a certain balance in order to qualify.  For more explanation, please feel free to contact me. 

Update on Thursday, November 4, 2010 at 8:52AM by Bryan Slaney

Part Three: NET WORTH

The Net Worth factor is where a lender has an opportunity to evaluate a person(s) profile.  Of course, net worth is positive if your possessions (assets) are greater than your debts (liabilities).  The opposite is considered a negative net worth.   Obviously, the lender is more likely to approve those with a positive profile. 

In many ways the best strategy is always to buy when you appear in control.  For example, you may have an excellent income but you posses four credit cards, an auto loan, a personal line of credit and a student loan.  You may be making all payments, but you “look” out of control.  The debts may also incur a negative net worth because employment income is not considered an asset.  

When trying to qualify for a mortgage, my advice is to seek out a professional mortgage broker, such as myself, to discuss your situation before buying.  A bank will not be so helpful, and do not provide options if initially rejected.   However, I have multiple lender options, so if you do have a lower credit score, we can still try several options to get you a mortgage. 

After doing an application, I will be able to tell you your credit score, if your ratios work, and if your net worth is high enough to qualify for the maximum mortgage to get the home you desire.  You can fill out an application online today! (See above: “Apply Now!”).

I hope this information in three parts has become a helpful tool and a reminder to keep a solid credit score by always making payments on time, and keeping debt to a minimum.