Time For A Budget

Many credit issues are caused by overextending credit or another way of stating that - not adhering to a budget. Underwriters frequently face the problem of increased housing expense while reviewing loan applications. Stated simply, if the homebuyer is asking for a loan that will have a payment higher than their current housing expense, is it possible for them to make the higher payment? If the applicant has been saving an amount each month that covers the difference, it is a strong indication they can afford a higher payment.

This issue came up recently in a class I taught for first time homebuyers. One of the participants asked, "What if you aren’t saving by choice?"

My answer, "What are you proposing to give up after you buy a home? Nice shoes by-the-way, are they new?" Even she had to laugh with the rest of the class, exactly the point.

The loan officer that originates the loan application must include any documents provided by the applicant that supports the loan request. Fight fire with fire!!! This is the slickest trick I have ever thought up for using the system to trump the system. Freddie Mac publishes a sample budget on their web site under some obscure section (and I think it gets moved around). I saved a copy long ago. What is the underwriter going to think when he or she discovers a budget in the file that documents the ability to afford a higher housing expense AND it is on a form provided by Freddie Mac and contains the Freddie logo? I promise you it will be like finding a candy bar in the file. Well, lookie what I found!

In all the years originating loans I have never had a homebuyer offer a copy of their budget as part of the support documents. What a killer tool this would be especially if it documents a turn around contained in the credit report.

Send me an email if you want a copy of this form and I will send it ASAP: jsimms@cmcloans.com

Mortgage Rates Hit The Low Point

Here is the most frequent question I am asked about interest rates, "How much lower do you think they can go?" Whenever asked this question (everyday) my answer is a simple observation, "There are more numbers above the current rate than there are below it."

The most common rate mistake I have witnessed over the years is when people wait for another 1/8% improvement and then lock when the market moves up ¼% or ½% instead of down. Consider this, on a 30 year fixed rate loan of $200,000 with a rate of 5% the monthly payment is $1,073.64. An 1/8% improvement to 4.875% results in a payment of $1,058.42 which is a monthly savings of $15.22. Over the life of the loan that is a potential savings of $5,479. Not bad if the loan is not paid off early.

Now let us assume the rates move up instead of down, many people will lock on a ¼ point up tick but almost everyone that does not will when it hits ½ point higher. The same loan amount of $200,000 with a rate of 5.5% will have a monthly payment of $1,135.58 or $61.94 per month higher than the 5% rate. Over the life of the loan that is a $22,298 mistake!

Of course the majority of homebuyers will not keep the loan for 30 years. This is the reason I warn against any rule of thumb approach. It is personal, what works for your neighbor may not be the right path for you.