LESSON 3: Your Financial Self-Assessment

HOW MUCH HOME CAN YOU AFFORD?

Prequalification is a preliminary and important step on the way to becoming a homeowner. It is often said you can borrow 2 1/2 times your annual gross income.

The actual lending process is more complex, however. Lenders traditionally use debt-to-income ratios to prequalify borrowers.

PREQUALICATION COMES BEFORE PREAPPROVAL

* Prequalifying does NOT guarantee you a loan amount.

* Preqaulification DOES confirm that you have the basic financial health necessary to obtain a loan.

NOTE: The actual preapproval process is a thorough examination ofyour finances and credit. At the end of THAT process, you can get a commitment letter that guarantees you an actual loan or monthly payment amount.

AVOID THIS COMMON BUYER MISTAKE:

1. You start your search with ONLY a prequalification.
2. You find a home you LOVE and make an offer.
3. Then you realize you DON'T actually have a loan.
4. By the time you are preapproval, somebody else has locked up your house!

CONDUCT YOUR OWN FINANCIAL SELF-ASSESSMENT

NOTE: Print this lesson and follow the steps to prequalify yourself for a home loan.

1. Determine your total gross monthly income.
   *Be sure to include salaries, tips, dividends, interest payments, and bonuses earned by ALL adults in the household
2. Determine total monthly debts - the big ones
   *Car payments, other loans, time payments, insurance, alimony, child support, college savings, memberships

STEP 1: THINK LIKE A LENDER!

Lenders use "debt-to-income" or "qualifying ratios" to determine the size of home payment you can afford and amount you can pay monthly on other debts.

DIFFERENT LENDERS USE DIFFERENT PERCENTAGES

* Some common ones are 28/36, 33/38 and 29/41 for FHA loans.

* Find out what percentages your preferred lenders use so you can do the calculations using THEIR percentages.

WHAT DO THE NUMBERS MEAN? (we will use 28/36)

* The first number (28) is the total percentage of your income that you can spend on a monthly home payment. FOR EXAMPLE: your gross monthly income is $6,000. the maximum monthly payment you could afford (according to lenders) would be 28% OR $1,680.

* The second number (36) means your monthly debt payments, other than your mortgage, should be NO GREATER than 36% of your gross monthly income. FOR EXAMPLE: your gross monthly income is $6,000. the maximum debt allowed would be 36% or $2,160.

TIP:
Most lenders will look at your ACTUAL debt and subtract that from your MAXIMUM debt to get a more realistic amount they feel you can pay each month. FOR EXAMPLE:
* Your maximum allowed debt is $2,160.
* Your real monthly debt is $600.
* Subtract actual debt from maximum to get $1,560.
* $1,560 is closer to the amount a lender will okay.

REMEMBER: The monthly home payment should include taxes,insurance and any other regular fees such as home association assessments.

STEP 2 NOW RUN YOUR OWN NUMBERS (PRE-QUALIFICATION)

• Gross monthly income x 28% = maximum mortgage payment
• Gross monthly income x 36% = maximum debt payment allowed
• Deduct your actual monthly debt from the maximum debt
• This amount is close to what a lender will approve

STEP 3 WHAT'S IN YOUR CREDIT REPORT?
The last important step is to CHECK YOUR CREDIT.

• Great! You have no outstanding debts.
• But don't assume your credit report is clean.
• Mistakes happen.
• Mistakes can cost you the chance to be a homeowner!
• Take the time to obtain your credit report.
• It only costs few dollars.
• Review it and fix errors BEFORE you see a lender.

NOTE: Request your report from a major credit bureau:
Equifax : 800.685.1111
Experian: 888.682.7654
Trans Union: 800.888.4213

NEXT UP: Find a lender and get your loan.