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No
Major Purchase of Any Kind
Review
the article titled, "Don’t
Buy a Car," and apply it to any major
purchase that would create debt of any kind. This
includes furniture, appliances, electronic
equipment, jewelry, vacations, expensive weddings…
and
automobiles, of course.
Why
You Should Not Buy a Car
When
you get a raise or accumulate some savings, you may
find yourself confronted by an innate instinct of
modern civilized men and women.
The
desire to spend money.
It
begins simply, by going out to restaurants, then
accelerates to purchasing clothing, electronic
gadgets, and since North Americans have a special
fondness for the automobile, you may even buy a
"brand new car."
If
you're married or ambitious, a few months later your
thoughts eventually turn toward buying your own
home. Or a move-up home, if you are already a
homeowner.
Next,
you contact a loan officer to get prequalified for a
mortgage loan. You state your desired price
and how much you can put down. You provide
your income and may even supply pay stubs and W2
forms. The loan officer methodically crunches
the numbers (by telephone, in person, or even over
the internet).
"If
only you didn't have this car payment..."
Debt-to-Income
Ratios and Car Payments
You
see, when determining your ability to qualify for a
mortgage, a lender looks at what is called your
"debt-to-income" ratio. A debt-to-income
ratio is the percentage of your gross monthly income
(before taxes) that you spend on debt. This will
include your monthly housing costs, including
principal, interest, taxes, insurance, and
homeowner’s association fees, if any. It will also
include your monthly consumer debt, including credit
cards, student loans, installment debt, and….
…car
payments.
How
a New Car Payment Reduces Your Purchase Price
For
example, suppose you earn $5000 a month and you have
a car payment of $400. At current interest rates
(approximately 8% on a thirty-year fixed rate loan),
you would qualify for approximately $55,000 less
than if you did not have the car payment.
Even
if you feel you can afford the car payment, mortgage
companies approve your mortgage based on their
guidelines, not yours. Do not get discouraged,
however. You should still take the time to get
pre-qualified by a lender.
However,
if you have not already bought a car, remember one
thing. Whenever the thought of buying a car enters
your mind, think ahead. Think about buying a home
first. Buying a home is a much more important
purchase when considering your future financial well
being.
Do
not buy the car. Buy the house first.
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Don’t
Move Money Around
When
a lender reviews your loan package for approval, one
of the things they are concerned about is the source
of funds for your down payment and closing costs.
Most likely, you will be asked to provide statements
for the last two or three months on any of your
liquid assets. This includes checking accounts,
savings accounts, money market funds, certificates
of deposit, stock statements, mutual funds, and even
your company 401K and retirement accounts.
If
you have been moving money between accounts during
that time, there may be large deposits and
withdrawals in some of them.
The
mortgage underwriter (the person who actually
approves your loan) will probably require a complete
paper trail of all the withdrawals and deposits. You
may be required to produce cancelled checks, deposit
receipts, and other seemingly inconsequential data,
which could get quite tedious.
Perhaps
you become exasperated at your lender, but they are
only doing their job correctly. To ensure quality
control and eliminate potential fraud, it is a
requirement on most loans to completely document the
source of all funds. Moving your money around, even
if you are consolidating your funds to make it
"easier," could make it more difficult for
the lender to properly document.
So
leave your money where it is until you talk to a
loan officer.
Oh…don’t
change banks, either.
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Should
You Change Jobs?
For
most people, changing employers will not really
affect your ability to qualify for a mortgage loan,
especially if you are going to be earning more
money. For some homebuyers, however, the
effects of changing jobs can be disastrous to your
loan application.
How
Changing Jobs Affects Buying a Home
For
most people, changing employers will not really
affect your ability to qualify for a mortgage loan.
For some homebuyers, however, the effects of
changing jobs can be disastrous to your loan
application.
Salaried
Employees
If
you are a salaried employee who does not earn
additional income from commissions, bonuses, or
over-time, switching employers should not create a
problem. Just make sure to remain in the same line
of work. Hopefully, you will be earning a
higher salary, which will help you better qualify
for a mortgage.
Hourly
Employees
If
your income is based on hourly wages and you work a
straight forty hours a week without over-time,
changing jobs should not create any problems.
Commissioned
Employees
If a
substantial portion of your income is derived from
commissions, you should not change jobs before
buying a home. This has to do with how mortgage
lenders calculate your income. They average your
commissions over the last two years.
Changing
employers creates an uncertainty about your future
earnings from commissions. There is no track record
from which to produce an average. Even if you are
selling the same type of product with essentially
the same commission structure, the underwriter
cannot be certain that past earnings will accurately
reflect future earnings. Changing
jobs would negatively impact your ability to buy a
home.
Bonuses
If a
substantial portion of your income on the new job
will come from bonuses, you may want to consider
delaying an employment change. Mortgage lenders will
rarely consider future bonuses as income unless you
have been on the same job for two years and have a
track record of receiving those bonuses. Then they
will average your bonuses over the last two years in
calculating your income. Changing
employers means that you do not have the two-year
track record necessary to count bonuses as income.
Part-Time
Employees
If
you earn an hourly income but rarely work forty
hours a week, you should not change jobs. There
would be no way to tell how many hours you will work
each week on the new job, so no way to accurately
calculate your income. If you remain on the old job,
the lender can just average your earnings. Lenders
usually like to see two-year history of part-time
job before using your income for qualifying for a
home.
Over-Time
Since
all employers award overtime hours differently, your
overtime income cannot be determined if you change
jobs. If you stay on your present job, your lender
will give you credit for overtime income. They will
determine your overtime earnings over the last two
years, then calculate a monthly average.
Self-Employment
If
you are considering a change to self-employment
before buying a new home, don’t do it.
Buy the home first. Lenders
like to see a two-year track record of
self-employment income when approving a loan. Plus,
self-employed individuals tend to include a lot of
expenses on the Schedule C of their tax returns,
especially in the early years of self-employment.
While this minimizes your tax obligation to the IRS,
it also minimizes your income to qualify for a home
loan.
If you are
considering changing your business from a sole
proprietorship to a partnership or corporation, you
should also delay that until you purchase your new
home.
BUT
if you really want a home, you can always go for a
stated income loan. Although the interest rate is
slightly higher, you can have a home of your dreams
without proving you income.
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