Signs itís time to hold off on mortgage loan
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By Scott Sheldon  August 16, 2013 12:00 am

You’re doing everything right, you’re paying your bills on time, you earn good income, and you’re applying for a mortgage with second thoughts. 

Maybe you’re trying to buy a new home, and something’s just not right, perhaps the proposed new payment is a financial squeeze. 

Paying attention to the signs means the difference between making a mistake worth thousands of dollars or choosing the path that makes more financial sense.

Upon applying for a home loan, a lender performs an audit of your credit history, credit score, income, employment status and job history as well as your ability to handle debt service liabilities. You can rest assured if the numbers don’t make sense, and home affordability is problematic for you, it will most certainly be apparent to the lender as well.

Here are five cardinal rules on how it pays to wait to get a mortgage loan:

1. Your debt is too high: If more than 10 percent of your monthly income goes to liability payments (car loans, credit cards or monthly debt service liabilities), not only will these liabilities hurt your chances of qualifying, they limit how much house you qualify for. Remember liabilities (debt) erode borrowing power to a ratio of 2 to1. In other words, a minimum payment on a credit card at $100 per month, needs $200 per month in income to offset that liability. Something else to consider, how much more manageable would a mortgage payment be without those liability payments?

 

2. Your income is too low: Perhaps your income is either eroded by liability payments, or perhaps the income is just not high enough to support a house payment relative to the purchase price range you desire to be at. This differs in many markets, but generally, you need to have enough income to take on at least a total house payment of $1,500 per month when buying a home. How much income are we talking about? At a minimum, just shy of $40,000 per year, 55 percent of a $1,500 mortgage payment.

 

3. You don’t have a down payment and closing costs: You’ll need it least 3.5 percent of the purchase price for a down payment. This can be your money or it can be gift money. On house for $300,000 for example, that’s a down payment of $10,500. Gone are the days of attaining seller credits for closing costs. Typical closing costs are approximately 3 percent of the purchase price, so that same house for $300,000 translates to an additional $9,000 needed for closing costs, for a grand total of $19,500 to be successful in purchasing that home.

 

4. Your employment is not stable: Possible change of careers? How about a job gap? All of the these may not only hurt your potential ability to qualify for the loan, but whether or not a new house payment can be supported with questionable income. This includes changing jobs status, for example going from being a W2′ed wager to self-employed and vice-versa as lenders will look at the income you show on paper (for at least 12 months). If you’re in a transitional state with your employer, and your income is potentially in question, buying a house in such a predicament is a recipe for disaster.

 

5.Your credit picture is less than stellar: Derogatory credit, like a bankruptcy or short sale or even a foreclosure? It’s an automatic two- to three-year wait to reenter the market. This is a prime opportunity to save for a down payment and closing costs and/or clean up the credit history or credit score to purchase a home later on. 

 

Note: Remember while you might still qualify for the mortgage now, that does not necessarily mean you should buy the property. The long-term prospectus of what that obligation means over time is paramount. Consider the effects the new mortgage payment will have on long-term savings ability, household cash flow and lifestyle. The last thing anyone wants is to be “attached” to their mortgage payment.

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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