|
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.
TOP
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.
TOP
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.
Top
|
