When Your Home Mortgage is Your Biggest IOU

Qualifying for a home mortgage has several factors. Chief among them is income. Sufficient income that often comes from having a job for more than two years. You’ll need your payroll check stubs to validate your income. You may even need a copy of your income taxes over the last two years. If self-employed, you’ll absolutely need two years tax returns plus other financials such as a P&L. Your credit score is a significant component to securing a mortgage and a favorable interest rate. You more than likely will need a down payment and verification on where the money came from. A mortgage payment is comprised of principal, interest, property taxes and homeowner’s insurance (aka= PITI). The length of the mortgage will also dictate the amount of the mortgage payment. But, how much should the payment be? Major lenders who provide conventional loans will dictate that your PITI and other monthly debt payments such as credit cards and car loans, not exceed 36 percent of your gross monthly income. Further, they will not want your PITI by itself to exceed 28 percent of your gross monthly income. If you have a history of not receiving an annual tax refund, you may want to target your mortgage payment and other monthly debt payments so they do not exceed 25 percent of your monthly net income.

Refinancing your mortgage could save you thousands of dollars a year and increase your monthly cash flow, but the cost to refinance may be prohibitive if you’re planning on living in your home less than three years. You need to first subtract your old payment from the new payment. Then divide the difference into your total cost to refinance, not just out-of-pocket costs. This will give help you determine the number of months it will take you to break even. Lastly, establish a reasonable expectation on how long you think you’ll live in your house. The math will always dictate the economic value of the transaction.

There are several mortgage products for you to consider. Most of them are designed on the length of the amortization schedule. There are 40-year fixed interest rate mortgages, but the interest is higher than a 30-year fixed interest rate mortgage. There are 30-year fixed interest rate conventions and FHA mortgages, as well as 15-year fixed interest rate mortgages. There are also short-term adjustable rate mortgages (ARMs): 7/1, 5/1 and 5/1 interests only. Be very careful with ARMs and be sure to know your monthly cash flow and cash liquidity if you need to cash out. Realtor expert Mike Bodeen would say that going for an ARM with today’s basement level rates borders on insanity.

Whether you’re securing a mortgage for a new home purchase of refinancing your existing home, you need to incorporate an experienced financial advisor who is well-versed with mortgage considerations and can help you determine the best mortgage for your situation. Big banks and online lenders have vastly improved their mortgage processes in the last few years, but no one will help you get the loan done like an independent mortgage professional who doesn’t get paid till the loan is done! Watch the interview with Mike Bodeen to learn what level of service you may need and what considerations you may have overlooked.