Personal Finances: Things to Remember When Applying for a Loan
The first step in buying anything, be it a pair of pants or a house, you have to figure in your personal finances. You have to think about how much income you generate, and how much you spend for your living costs. Anything extra is not yours to spend just yet. I’m pretty sure you also have car loans, and savings to count in. After that is the only time you can really see if you can afford home ownership.
The first person you encounter when applying to borrow money is a loan officer. The only thing he will consider before approving your loan is how much income you have on paper. Computations he will apply depend on what kind of work you have. There are different calculations for every profession since you may be getting paid hourly, weekly, bi-monthly, or monthly. Your bonuses, overtime, and commissions do not get figured in because they are not steady and current sources. This means you will have to provide salary documentation over the last two years.
Your extra income from bonuses in the past years will be totaled and then added to your regular income. If you would like a close estimate of how much that figure is, get your W2 forms, sum them up, and then divide the answer by twenty-four months. You get your monthly income.
If you have your own home based business and are self employed, you need to look at the salary documents you pass to the IRS. This might be a bit of a problem if you put in more expenses than what you really spent on as this could mean less profit for you on paper.
After determining your income, lenders compute for the maximum amount you can afford on mortgage. This is how much percentage of your monthly income you can allow for debts. It’s called a debt-to-income ratio. There are two parts to this; the front ratio which is the percentage of your monthly mortgage payments to your income, and the back ratio, which is the monthly mortgage payments plus other debts you are currently paying for.
A typical ratio is 33/38. This means 33% of your monthly income could go to the mortgage repayment and the overall percentage of your monthly debt payments amount to 38% of your monthly salary.
Of course, there are other factors to be considered. One of these is how much down payment you can put in. If you can make a large enough down payment, the rules become more flexible against putting a small amount. Also, your creditworthiness is looked into; an excellent credit gives you more leverage for your mortgage scheme. Moreover, different lending companies have varied loan types, leading to more rules and guidelines.
There are also other things you have to consider on a personal finance level. You will need to look at how much the monthly payments will be and how long the terms of repayment are. If you have a mortgage for the next 30 years, would that be all right with you? Would you like a shorter term? If you do, then you will have to choose or be ready to qualify for shorter terms that have higher monthly payments.