Analogies sometimes help individuals not familiar with a certain industry to understand a related concept.  One of my favorite analogies in the mortgage industry is the one that compares a Loan to a Chair; for good support, both require four legs!

The 4 “legs” of a loan are:

1.       Credit Score

2.       Loan To Value

3.       Debt to Income

4.       Documentation

Credit scores are fairly easy to understand:  If you pay your bills on time, you should have good credit.  Credit scores allow lenders to evaluate the past payment history of an individual and determine the implications in regards to future probability of loan repayment.

Credit is an important determining factor in many areas of one’s life. It can determine the interest rate they receive on car loans, credit cards, and mortgages. Even employers sometimes look at credit scores to determine is a candidate is worth the financially responsible.   It is important to review your credit report regularly (at least once a year) to determine what is being reported about you and to make sure the information is accurate.  Many lenders have analyzers that can help determine if there are things and individual can do to improve their scores.  These analyzers can often predict “what-if’s”, such as paying off or down on various accounts, opening or closing accounts, and increasing or decreasing a credit line.  These various actions can often reward the individual with the ability to maximize their credit scores. 

Loan to Value (LTV) is the amount you are putting down to the value of the home or the equity you have in your home.   The more you put down the less risky you are to a lender.  If you have sufficient resources to purchase the home in cash you do not need a mortgage.  For those of us that are not in that situation we will want to balance our precious resources of cash to the cost or monthly payment to find a balance that works best for each family’s personal situation. 

Debt to Income (DTI) indicates to the lender whether or not you can afford the home.  Lenders consider 2 ratios:  The Housing Ratio and the Total Debt Ratio (also known as “front ratio” and “back ratio”).  When one thinks in terms of a budget, they typically look at their net income or what they take home each month.  Mortgage lenders look at the Gross income with W-2 borrowers.  Income is calculated differently for a salary borrower than it is for an hourly borrower.  If an individual works 2 or more jobs, receives bonuses, overtime or commission, then 2 or more years of these records are necessary to be able to use the income to qualify.  In addition, the most recent 2 years of filed federal tax returns with all schedules and W-2’s are analyzed to determine the income that can be used to qualify.  Often times, prospective borrowers are shocked to learn that unreimbursed employee expenses on their federal tax returns can impact their ability to count the income they believe they are earning.  Self-employed borrowers are calculated in yet another way. 

Documentation is rather easy to understand in that it is just the need to provide the documents necessary for a lender to make the determination of risk.  Typically a lender is going to require a minimum of 1 months’ worth of pay stubs, along with year to date info. In addition, the past 2 months of the most recent asset/bank statements will also be taken into account. It is important that an individual is prepared to provide all pages of the required statements, in addition to sourcing any of the deposits that are not direct payroll deposits. Be especially careful during the time of a mortgage transaction to limit or eliminate any “non- sufficient funds” as well as overdraft protection charges.

Depending on the Program, each of these 4 legs will impact the loan and qualification/pricing. Send me an email at sarah.c.pichardo@gmail.com or give me a call at (703) 929-1701 so we can determine the program that will best benefit you.

We’ve all heard it’s a great time to buy. However, there may still be some lingering questions pertaining to the benefits and incentives to home ownership. The pride of home ownership is culturally ingrained. We all know, starting in childhood, that one day we will grow up, choose a career, find a partner, and buy a house. Unfortunately, a turbulent economy and an uneasy housing market have driven many to postpone home ownership.

With the recent rebound of the housing market, and interest rates at a 50 year low, one may ask, “What is the REAL benefit in homeownership?” Well, aside from the just the pride of ownership itself, financial security is also reinforced. As a renter, you are only bound to your residence by a lease, and when your contract ends, you can get up and move as you please. This is good for those with occupations that call for frequent relocation. For those with careers and families, especially those with children, it is in their best interests to become established within their community. Many don’t want the “burden” of a mortgage, but fail to realize the contingency of their financial situation when an individual other than themselves decides their monthly housing or rent payments.

Purchasing a home not only provides financial security, but can provide financial growth as well. When you rent a home, you are helping somebody else pay his or her mortgage. By purchasing your own home, you are essentially taking money each month from your right hand pocket, and putting it in your left hand pocket for later. For most taxpayers, the interest you pay on your mortgage qualifies as a deduction against you income, allowing you to keep more of the money you make. In addition, a traditional mortgage ensures that each portion of your mortgage payment goes to paying off the actual mortgage debt, thereby increasing the portion of the house that you actually own. If you eventually decide to move, you can get all your money back if you sell the house for what you bought it for, or you can even make money if the value of the house has risen, and you sell it for more than what you bought it for.

In the Northern Virginia area, the average increase in the value of homes historically (over a 50 year period of time) has been approximately a 6% growth. This value takes into factor year to year fluctuations and economical corrections- the area has seen growth in excess of 20%, in addition to occasional losses and drops in home values. However, taking the average of this 50 year span, home values in the area grow an average of 6% each year. This growth, even in during the time of economic instability, give a strong indication that as the economy continues to rebound, home values will continue to rise. At this time, the prices of homes are still lower than they have been in years, but are paired with mortgage interest rates that are lower than they have been in 50 years!

In all the ways that one can build financial wealth, it is through home ownership that many Americans attribute their success. One of the reasons we have been so successful in amassing our personal wealth is due in part to the home buying programs we have here in the US, that allow us to leverage what we have to increase our wealth. There are programs that allow little money down, and Virginia even has programs that allow for no money down! By leveraging a small amount of money (your down payment) you can have a large amount of money (your mortgage) working for you to help build your financial assets.

Knowing whether or not it is the right time for you to purchase can be an easy process – speaking with a lender will allow you to evaluate your options. Keep in mind that neither your lender or realtor will be making your monthly payments for you, so it is important to ensure that you maintain control, and not allow yourself to become contractually obligated to a home that exceeds your comfort zone for the monthly payment. Many first time homebuyers will prepare a budget with what they currently make balanced against monthly financial obligations. With a firm figure in mind for your monthly payment comfort zone, a good idea of the available money you have to put down can help you quickly determine the best program available to you.

Make sure you and your lender speak the same language, in that when you discuss your payment, it includes all the components: Principal & Interest, Taxes, Insurance, Mortgage insurance (if needed) and the HOA or condo fee if applicable. Acceptable sources of down payment may be from the borrower’s own checking/savings/ 401K accounts, employee benefits/Live near Your Work programs. Some programs will allow gift funds, but all programs do require that the source of funds used be satisfactorily explained.

Some of the most used programs available today include:
• Conventional
• FHA
• VA
• VHDA
• USDA

Make an appointment today, and we can go over your personal and financial situation to determine you options, and whether or not it is a good time to buy. Even if it isn’t, I can provide you with the information and resources you need to get on track for the path to home ownership! Call me at (703) 929-1701 or email me at sarah.c.pichardo@gmail.com.