Debt to Income Ratio Measures That Can Merit Loan Approval

Before even considering taking out a loan, you may want to know beforehand if there is a possibility that your application will be approved. There are many factors that a lender undertakes before a loan application can merit approval. One way to determine it is through the debt to income ratio. This ratio represents the percentage of debt allocated within your income. The debt includes the existing and the amount that is still being applied. As such, the higher the amount of existing debt, the lower the chances of the loan application being approved especially if the loan amount will exceed the acceptable debt ratio considered by lenders.

Definitely, no lender will ever let their money borrowed if they do not see any capability on the loan applicant to pay back what was borrowed plus any interests. They always want to make sure that the money they have lent will be returned to them within the agreed monthly payments. This is why lenders have several measures to make sure that they are giving the loan to the right borrower. Typically, to merit an approval from a lender, the debt to income ratio of a loan applicant must not go beyond the 36% to 42% bracket. This means that if a loan applicant has an existing debt that already takes 25% of his net income, the additional loan amount that he can be allowed to borrow will only be within 11% to 17%. The amount of a loan one can get is also called their borrowing power.

This is what the lender believes the only allowable and acceptable range to which a loan applicant can still manage to pay his obligations. Beyond this percentage, there will already be uncertainties whether the borrower can still pay what has been borrowed.

Most lenders are really very cautious when giving loan approvals to protect their business from loss due to payment defaults. Their business grows through the interest earned by the money they have lent. Further, because they are dealing with money, they want to make sure that it should only be entrusted to the right one. This is the reason why they have to give a ceiling to the debt to income ratio. In essence, this debt ratio is not just helpful to lenders in determining the right clients for them. This can also be beneficial to borrowers as this ratio will help them manage their finances better. Through this ratio, they can know whether they are already borrowing beyond their means.

The bank says you don’t have the borrowing power; Why?

Qualifying for a home loan is not as easy as it used it be. Before, almost everyone got approved. Now, banks are a little more careful about whom they lend money to. They want to make sure the borrower can actually payback the money according to the terms of the loan. They do that by determining your borrowing power. When the bank says you don’t have the borrowing power – wait, you don’t have to go to the bank to know this, just check out a mortgage calculator.

This easy to find online tool can help you determine whether you have enough borrowing power to afford to buy a home before you go to the bank. Borrowing power figures heavily in your credit-worthiness. It’s based on your income and financial commitments. Your income, debts, monthly bills, dependants and credit limit are compared to give you an estimate as to how much you can borrow. Your credit limit, income and past defaults are all factors. A bank may also consider a person with the option to go into more debt a higher risk. It’s important to understand that lending criteria can vary by institution and may also consider living expenses and your saving habits.   

Once you’ve used our borrowing power calculator, be honest with yourself. Bring all your financial skeletons out of the closet, even the scary ones. It’s better to take care of any potential hindrances before you go to the bank. Some fixes are easy, others may require years. You can start with pairing down your credit cards, especially high interest department store cards. Less debt in general equals more money available to pay on the loan you’re applying for.

Considering the wide availability of these tools online, there’s no reason for an applicant to endure this rejection. Know your borrowing power before you go to the bank.

How Long Will It Take To Pay Off My Mortgage – Interest Calculators

Most people want to use my mortgage interest calculators before buying a home to figure out the monthly mortgage payment and to see how much principal they’ll be paying each month. However, using a mortgage calculator when you already have a mortgage is still very useful to figure things out about your finances.

I hear a lot of questions like: How long will it take to pay off my mortgage if I start adding extra prinicpal now? How much do I need to add to my mortgage to pay it off in 15 years?

The interest calculators on this website will show you everything you might have questions about. The basic calculator on my home page will tell you to plug in your mortgage details, interest rate and amount of years you started the loan with. Then there’s a spot to add extra principal per month. It will show you how much interest you’ll save and how many years you’ll save by adding the extra money.

If you’ve already been paying your mortgage for 5 years you should plug in the amount of years you have left (say 25 years) and the amount left on your mortgage after the principal you’ve already paid. The easiest way to do that is to plug in 25 years, your interest rate and keep lowering your mortgage amount until you get your exact monthly mortgage payment. That will be the amount you still owe to this day.

The reason for doing that is that you’re only adding extra principal for 25 years of the mortgage. So you can’t calculate it using the 30 year term because you’ve already missed out on 5 years of adding the extra principal.

That’s just the basic calculator. If you want to get more in depth about your payment and loan then you can use the more informative calculators to help you with your questions. There are borrowing power calculators, debt ratio and mortgage comparison calculators to help you with any piece of your mortgage payment you can think of.

If you want to figure out how many years it will take you to pay off your mortgage then it’s very easy. You can plug in the amount you currently owe on your mortgage and change the years to the desired amount which will change your monthly payment. That will be the new monthly payment you need to start making (which will add the difference to principal) and you’ll pay your mortgage off in that time period.

To check your math you can simply keep adding money to the “added monthly principal” part of the calculator until it tells you that you’ll pay it off in that many years. The sum of you current mortgage payment and the added principal should equal the same number as just changing the years from 30 down to your desired amount.

You don’t have to start using the interest calculators with a specific plan of attack. Just play around with them to see how much money you’ll save if you add a certain amount of money. Even adding $50 per month will have a very big impact on how quickly you pay off your mortgage and how much interest you’ll save over the years.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

I Bought A Short Sale and Closed Today!

I’m starting to live the real estate investing life that I explain to everyone else! I’m closing on my 3rd condo today and I’m going to explain the process to let everyone know how easy it can actually be for you too.

First of all, a short sale is one that the seller owes more on the mortgage than they’re selling it for. I’m buying a condo for $35,000 and the owner owed $110,000 on it so it’s a “Short Sale”. I had to negotiate a price with the seller which was accepted at $33,000 and then the bank started negotiating with me too and got it up to $35,000. However, I knew it was still a good deal because my real estate agent checked out the last 4 condos in that complex to sell and they were still all above $35,000.

It’s a 2 bedroom condo in SC and I live in NH. I had the real estate agent take pictures of the inside because he said it probably needs to be painted. Including the closing costs I’ve paid about $38,000 and plan on painting it for less than $1,000 to rent it out for about $700 per month.

So I have a power of attorney signing the papers for me today in SC. Then she’s going to send the keys to Southern State Management which is a property management group. They handle everything for me starting with hiring the painter. I signed an agreement with them already to rent out the condo at $700 per month which will cost me $300 up front and then 9% of the rent each month.

Which that money they handle all phone calls with problems, fixing the problems, writing up a legal lease agreement, collecting the money, adding late fees when needed and sending me the check each month. They’ll also take the neccessary actions to evict the tenant if they aren’t paying their rent.

So I used a mortgage calculator to see what my monthly payment would be for a $35,000 mortgage. However, you’ll need 20% for a down payment and I didn’t have anything. I got a personal loan for $10,000 which was for the $7,000 down payment and $3,000 in closing costs. My interest calculator says it’s $225 over 5 years at 13%. Then there’s $28,000 left for a mortgage over 30 years which is $170 per month.

New Monthly Bills

Personal Loan – $225
Mortgage Payment – $170
Taxes – $100
Condo Fee – $150

Total – $645
Rent – $700 – 9% = $630

So I’ll be basically breaking even month to month and buying a condo for $15 per month. I’m also paying principal which is savings and I’ll get a tax deduction at the end of the year for my taxes and interest paid on the mortgage. That’s about $140 per month in interest and $1,200 for the taxes. So a deduction of $2,880 adds about 20% of that number to your tax refund!

Buying my 4th condo!

I have my SC real estate agent looking for a good condo deal for me all the time even though it will take me a few months to buy another one. I like to keep an eye on everything going on because if another condo sells in my new complex for $30,000 if gives me a lot of information to my next purchase.

Before I bought this condo I was approved to spend $1,000 per month worth of borrowing power. That means my new personal loan, mortgage payment and taxes can’t be higher than $1,000. Now I’ve already spent $645 worth of it so how will I buy another one?

Now that I’m renting it out the rent is income! $630 per month as income but the bank only accepts 75% of that number because they figure in 5 years you’ll be out about 25% of the months total.

Total – $1,000 + 470 (630 x .75) = 1470

First Cond0 – 645
New Condo – 645

Total $1,290

That means I can get another personal loan for $10,000 for the down payment and closing costs and another mortgage for $35,000. Then I’ll rent it out and do it all over again. I’ll keep buying homes unitl the bank doesn’t let me anymore because I KNOW real estate will go up eventually. A standard 2 bedroom condo sells for over $100,000 in most areas and was selling for $150,000 in this complex 5 years ago. So I have high hopes for the area I’m buying in right now.

Then I just have to break even month to month until it goes back up to the price it was 5 years ago. I have plenty of time to wait and plan on using real estate as my retirement plan. That will probably be the best option for me.

Use my mortgage calculator to see how much you can afford each month and only look at foreclosures and short sales so that the mortgage and monthly payments stay very low. Take your time, I’ve only bought 2 now over the course of 2 years because I’m looking for the perfect deal each time and don’t want to get myself in financial trouble.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Is Real Estate Investing Possible Without Down Payments?

There are infomercials on TV a lot about real estate investing without any down payment. Of course they talk about how rich you’ll get with minimal effort buying and selling homes. This is possible, however there’s a lot of knowledge you need to complete the task.

Down Payment Options

There are a few options for down payments that you can look into. In order of the lowest interest rate there are home equity loans, retirement plan loans, personal loans, credit card loans and possibly a loan from a family member. You’ll need at least 20% for a down payment on a condo or single family home and it goes up to at least 25% for a 2 or 3 family home.

Before explaining each option you need to see what your borrowing power can handle. Take 40% of your gross income per month and subtract current loans you already have. Don’t subtract insurance or house bills. The amount left over is the amount you can afford per month in new loans assuming your credit score is up to par.

Let’s assume you have $1,400 left over to spend. If you have $500 or less left over I’m sorry but investing in real estate will probably not work for you, but read on to see why. So, with $1,400 you’ll need one of the loans above for a down payment of 20% and then your new mortgage payment and monthly taxes need to fit into it as well.

The first attempt to get a down payment should be something with collateral because the interest rate will be the lowest. If you have anough equity in your home or you have a paid off car then you can pull a loan against those to start. A home equity loan is the current worth of your home minus what you owe on the home.

Your home is worth $210,000
You owe $150,000
Home Equity = $60,000

However, banks in this 2011 economy are only offering 80% home to value equity loans. This means 80% of 210,000 = $168,000 is the starting point, not $200,000. So in this equation you can only pull $18,000 from your home. Even if you’re looking for $30,000 for a down payment you still want to get the $18,000 from your home because the interest rate is lower.

The next thing to do is pull from a retirment plan you have such as a 401K. Worst comes to worst get a personal loan for the next $12,000.

Available Spending = $1,400

Home Equity Loan – $190
          18,000 over 10 years at 5% interest
Personal Loan  -  $273
          12,000 over 5 years at 13% interest

New Available Spending = $937

Now you can afford up to a $150,000 with a 20% down payment of $30,000 and you still have $937 available for your new mortgage payment and monthly taxes. A mortgage calculator will show you that a $150,000 home with a 20% down payment will be a mortgage payment of $644 per month. That means the taxes need to be less than $3,500 per year or $293 per month and you’ll be approved for the mortgage pending your credit score.

Available Spending = $1,400

Home Equity – $190
Personal Loan – $273
Mortgage Payment – $644
Monthly Taxes – $220

Available Spending Left – $73

Now you lost all of your borrowing power in this one investment so how do people continue investing?

Let’s assume it takes you 2 months to rent out the property you bought and you get $1,500 per month and a signed lease for one year. These tenants will need to be there for about 7-8 months and you’ll be able to count 75% of the rent as income.

1500 x .75 = $1,125 per month plus the $73 left over giving you $1,198 to start again.

You just saw that it took $1,400 to afford a $150,000 home so now you should look at something closer to $100,000 to $120,000 in order to get approved for the mortgage.

Start from ground zero and get your down payment. Then use my free mortgage calculator to figure out how much of a mortgage payment you can get again. Math always works and you’ll get approved as long as the bank continues to trust you’ll pay back the loans you get.

Banks DO NOT allow you to take a home equity loan on an investment property. So if you want to pay extra principal make sure it goes towards your primary residance so that you can get a loan for the money if you ever need to.

Also, if you have any construction skills and you buy a property that needs TLC you could fix it up and sell it for a profit. Then you have extra cash and a fresh borrowing power amount to start from again.

Knowledge Will Save You Thousands!  The Free Mortgage Calculator

Only 2 Reasons for an Interest Only Mortgage Loan

If you’ve been keeping up with my blog and website then you know I’m very much against interest only loans because they’re used for the wrong reasons. However, they were created for 2 reasons which are actually quite beneficial.

First, the reason I don’t like these loans being available to everyone is because they’re used to get people approved for a mortgage that couldn’t get approved for a standard fixed rate mortgage.

If you’re a couple looking at buying a home and the bank figures out your borrowing power to be $1000 per month and your fixed rate amount and taxes end up being $1100 you’ll be denied for that particular mortgage. However, an interest only loan is an adjustable rate mortgage and doesn’t include any principal in the payment which makes it much lower to start. That would get you approved for the mortgage in that case.

As you can see it’s a tricky move to get someone approved for the loan and for the banker to “write another mortgage”. Well chances are the couple will be very happy because they get to buy their home, but do they really know what they got themselves into?

That 4.5% interest rate will be fixed for 5 years and then continue adjusting each year with the current interest rate. With rates as low as they are now I don’t see how they could get any lower in 5 years so it will probably go up. After the 5 years are up the principal also gets added back into the mortgage which increases the monthly payment as well.

If your interest rate went up to 6% and the principal was added into the mortgage your payment would go from $800 to $1150. Now, if it was too high at $1000 to get approved for the mortgage how are you going to afford $1150 down the road? People seem to just say “Ehhh I’ll worry about it later, right now I’m getting a home!” 5 years later we have the biggest real estate crash the country has ever seen. 

That puts blame on mortgage lenders for giving the loans to these people just “to write another mortgage” and blame on the people taking these mortgages without knowing enough about them.

Why Interest Only Loans were Created

I can see 2 reasons why these loans are in exsistance and the first is for a person who flips houses for a living. Someone like this needs to keep all monthly costs as low as possible and an interest only loan is the way to go.

Assume this person has $1700/mo available borrowing power and finds his first home for $150,000 just like the example above. The fixed rate 30 year loan will cost $1100 including taxes which limits this house flipper to one home at a time.

If they got an interest only loan it would be a monthly payment of $800 and they’d be able to buy and flip 2 homes at a time to double profits. They aren’t worried about paying down principal like a home owner because they’ll be selling it within a few months anyways.

As a homeowner if you have an interest only loan you won’t pay down a dime of your home during the first 5 years then face an increased interest rate and added principal.

The second reason I can only KIND OF agree with is if a couple only has one income at the time due to this 2011 economy and the spouse plans on getting a job in the next year or two to support the increased payment that will be coming. Or similarly, a promotion in the near future for one or both people buying the home.

I know I’ve bashed this type of mortgage loan in many of my blog posts but it’s mostly because it’s been so abused by lenders in order to write new business with no care to what might happen to these singles, couples and families in 5 years.. Also, if people are living to their complete max then they leave no room for error.

Make sure you get the loan that best fits your scenario and usually if you’re buying a home to live in then it will be a 30 year fixed rate mortgage. Even ARM rates aren’t a great idea right now because interest rates can only go up at this point.

How a Mortgage Calculator Can Help You Understand The Buying Process

So you’re dreaming of buying a home. Are you ready? Do you have any idea where to start? If you’re unfamiliar with the steps involved in buying home, then the Internet is a great place to begin.

Search for mortgage and borrowing power calculators, they’re the perfect tool to help you understand the lending process.

          Nearly all financial institutions making home loans will have calculators on their sites. Before you apply for a loan you can figure out how much you can borrow with a borrowing power calculator. It allows you to compute how much you can borrow based on your income and debts. It allows you some insight into the difference between good and bad debt and how that debt affects your credit rating and how much you can borrow. You’ll see in the results how credit card debt, available credit and your debt-to-income ratio can make you look like a risk to lenders. 

          A mortgage calculator can help greatly in understanding how mortgage loans work.  You input the principal (the amount the borrowing power calculator estimated you could borrow), rate, term and down payment. You can compare all these variables to get a picture as to what you can afford to pay each month. To get a truer picture, look to see whether the calculator considers property tax or insurance.

Most will include an amortization schedule that breaks down over time how much of your payment goes to the principal and interest.

          Using these online calculators is a great way to gain some understanding about how lenders gauge risk. They can help you in setting goals to make yourself and your finances look attractive as possible to lenders. What you learn and apply will make your finances shine, showing that you’re a responsible borrower, worthy of great mortgage terms.