03
Dec
By Mike Pfefferman
Home Buyer Tips

Steps to Prepare for Future Home Financing and Year-End Financial Checklist

As the year draws to a close, it’s the perfect time to take a step back and review your financial health, especially if you plan to purchase a home next year. Whether you’re a first-time buyer or looking to upgrade, proper preparation can make all the difference when securing a mortgage with favorable terms. Here’s a comprehensive checklist to ensure you’re financially ready for home financing in the year ahead.

1. Review Your Credit Score

Your credit score is one of the most important factors lenders will consider when deciding whether to approve your mortgage application and what interest rate to offer. Obtain a copy of your credit report from the three major bureaus—Equifax, Experian, and TransUnion. If your score isn’t where you want it to be, take time to dispute any errors, pay down high-interest debt, and avoid missing payments as you head into the new year.

2. Save for a Down Payment

The more you can put down, the better your mortgage terms will likely be. Ideally, aim for at least 20% of the home’s purchase price to avoid paying private mortgage insurance (PMI). If saving 20% seems daunting, consider setting up automatic transfers to your savings account to stay on track. Every little bit adds up over time.

3. Evaluate Your Debt-to-Income (DTI) Ratio

Mortgage lenders closely examine your debt-to-income (DTI) ratio, which measures the amount of your income that goes toward monthly debt payments. Lower DTI ratios indicate to lenders that you’re more likely to manage your mortgage payments responsibly. If your DTI is high, focus on paying off existing debt to improve your chances of securing favorable loan terms.

4. Calculate Your Budget

Knowing how much home you can afford is essential. Use online mortgage calculators to estimate your monthly mortgage payments based on different home prices. Keep in mind that your mortgage payment should ideally not exceed 28% to 30% of your gross monthly income. Additionally, factor in other costs like property taxes, homeowners insurance, and home maintenance to avoid overextending your budget.

5. Check Your Savings for Closing Costs

In addition to your down payment, be prepared for closing costs, typically ranging from 2% to 5% of the home’s purchase price. These fees include appraisal costs, title insurance, and lender fees. Having extra savings set aside for these expenses will help you avoid delays when it’s time to close on your home.

6. Get Pre-Approved for a Mortgage

Before you start shopping for homes, getting pre-approved for a mortgage is a good idea. This process involves a lender evaluating your creditworthiness and financial situation to determine how much you can borrow. A pre-approval letter shows sellers that you’re a serious buyer and can give you a competitive edge in a hot market.

7. Set Financial Goals for the Year Ahead

Take time to review your financial goals and create a plan to reach them. Whether it’s saving more for your down payment or paying off existing debt, a clear plan will help you stay on track. Revisit your goals every few months to ensure you’re making steady progress toward homeownership.

Reach out by phone or email to discuss your plans. We can help you understand the latest loan options available, interest rates, and more to simplify the home-buying process and secure a loan that best fits your needs.

27
Nov
By Mike Pfefferman
Taxes

Why Tax Prep is Crucial for Mortgage Applicants

When you are preparing to buy a home, tax season should be on your radar as it plays a significant role in your mortgage application process. Whether you’re a first-time homebuyer or a seasoned investor, how you file your taxes can have a direct impact on the mortgage you qualify for. Understanding this connection can help streamline the process and potentially save you money on your loan.

How Tax Returns Impact Your Mortgage Application

The income reported on your tax returns is one of the most important factors in determining how much you can borrow for a home. For traditional mortgage loans, lenders typically rely on your reported net income (after deductions) to assess your ability to repay the loan. This means the way you file your taxes, including any deductions and write-offs, can significantly affect your borrowing power.

For example, if you are self-employed or earn income outside of a traditional salaried position, your tax returns will play a crucial role in assessing your qualifications. Let’s say your gross income for the year was $100,000, but you worked with your accountant to write off a substantial portion of that income for business expenses or other deductions. If those write-offs reduce your taxable income to $50,000, that’s the figure lenders will use to evaluate your eligibility for a loan.

It’s important to note that if your reported income is lower than you expected, alternative mortgage options, such as bank statement loans, may be available. These types of loans focus on your actual cash flow rather than relying solely on your tax returns. While bank statement loans may come with slightly higher interest rates or require a larger down payment, they could be a good option if your tax deductions are significant but you still want to access your home’s equity.

What If I Haven’t Filed My Taxes?

If you haven’t filed taxes, whether due to operating a cash-only business or another reason, you may still be able to qualify for a mortgage. There are alternative loan options such as bank statement loans or no-income-verification mortgages that do not require traditional tax documents. It’s essential to consult with a mortgage professional who understands your unique situation to determine which option is best for you.

What Do Lenders Look For on Your Tax Returns?

Lenders and underwriters closely examine specific line items on your tax returns to determine your ability to repay the loan. If you are self-employed, for instance, there are several expenses you may be able to add back to your net income to increase your qualifying amount. Here are some common items lenders adjust when reviewing your tax returns:

  • Net Profit or Loss (Schedule C): This is the starting point for determining your income. If it’s positive, it adds to your borrowing potential, while a negative figure may require additional documentation or justification.
  • Depreciation and Amortization: If you’re self-employed, any depreciation or amortization expenses from your business can typically be added back to your net income.
  • Business Use of Home: If you work from home, a portion of your home-related expenses (mortgage interest, utilities, etc.) can sometimes be added back into your income.
  • Depletion and Casualty Loss: These non-cash expenses can also be added back to your income.
  • Meals and Entertainment: These may be subtracted from your income if they were claimed as business expenses.

These adjustments can increase your net income, which in turn can improve your chances of securing a better loan. Being mindful of these potential additions or subtractions can help you prepare your taxes in a way that maximizes your borrowing power.

Strategies for Homebuyers to Prepare Taxes for Mortgage Success

  1. Work with a Tax Professional: To ensure your taxes are filed correctly and optimally for a mortgage application, it’s crucial to work with an accountant or tax advisor who understands the mortgage process. They can help identify deductions that may not be beneficial for homebuyers and ensure that your financial picture is as strong as possible.
  2. Keep Detailed Records: If you’re self-employed or a small business owner, maintaining clear and accurate financial records throughout the year is essential. This will help make the tax preparation process smoother and prevent any discrepancies when it’s time to apply for a mortgage.
  3. Consider Your Tax Deductions: Before you file, consider how your tax deductions impact your overall income. If your deductions are significant, you may want to discuss with your tax professional whether it’s worth reducing them to increase your income for mortgage qualification purposes.
  4. Prepare for a Tax Return Review: Be ready for your lender to carefully scrutinize your tax returns and potentially adjust your reported income. The more organized and transparent you are with your tax documents, the easier the process will be.

Tax preparation is a key step in the home-buying process, especially for self-employed individuals and those with non-traditional income sources. How you file your taxes can influence your mortgage application outcome, so taking the time to optimize your tax return before applying for a mortgage can be a game changer. Give us a call to find out more on understanding how taxes affect your borrowing power.

13
Nov
By Mike Pfefferman
Mortgage

Understanding the Components of Your Monthly Mortgage Payment

If you’re new to homeownership, you might be wondering exactly what makes up the mortgage payment you’re sending each month. Beyond just the loan amount itself, there are several different components that all factor into your monthly mortgage payment. Understanding these components not only helps you see where your money is going but can also assist you in optimizing your mortgage and possibly securing a better rate.

1. Principal

The principal is the amount of money you originally borrowed to purchase the home. It represents the bulk of your loan balance and is paid down over the term of your mortgage. For example, if you buy a home for $200,000 and make a 20% down payment ($40,000), the remaining loan amount of $160,000 is your principal.

With each mortgage payment, a portion goes toward paying down the principal balance. As you continue to make payments, the principal balance decreases, which ultimately builds your home equity. The larger the down payment you make, the less you’ll owe in principal.

2. Interest

The interest portion of your mortgage payment is what the lender charges for the loan. Think of interest as the cost of borrowing money. This amount is calculated based on the interest rate, which is typically expressed as an annual percentage rate (APR). Your interest rate is determined by several factors including your credit score, the size of your down payment, and your loan type.

Interest is usually paid off at a higher rate in the early years of your mortgage and gradually decreases over time. In the early stages, more of your monthly payment goes toward interest, and less goes toward reducing the principal. Over time, as the balance of your loan decreases, the amount going toward interest also decreases.

3. Property Taxes

Property taxes are typically one of the largest components of your monthly mortgage payment. These taxes are levied by your local government (city, county, or municipality) and are based on the value of your property. The revenue from property taxes is used to fund local services like schools, emergency services, and infrastructure.

Lenders generally include property taxes in your monthly mortgage payment by setting up an escrow account. This means that a portion of your monthly payment goes into an escrow account, and the lender will pay your property taxes directly when they are due. Keep in mind that property tax rates can fluctuate from year to year, so your mortgage payment may adjust accordingly.

4. Homeowner’s Insurance

Homeowner’s insurance is designed to protect you and your property in case of damage or loss from events like fire, theft, or vandalism. Most mortgage lenders require that you have homeowner’s insurance before they approve the loan, as it helps ensure the value of the property is protected.

Much like property taxes, homeowners insurance premiums are often included in your monthly mortgage payment. Your lender will then pay the insurance premiums on your behalf, through the escrow account. If you live in an area prone to natural disasters (such as floods, earthquakes, or hurricanes), you may be required to have additional insurance coverage, which can increase your monthly payment.

5. Private Mortgage Insurance (PMI)

If you put down less than 20% when purchasing your home, you may be required to pay Private Mortgage Insurance (PMI). PMI protects the lender in case you default on your loan. While it benefits the lender, it can add an additional cost to your monthly mortgage payment.

PMI is typically calculated as a percentage of the loan amount and is included in your monthly payment. However, it’s possible to have PMI removed once you have built up enough equity in your home (usually after you’ve paid down your loan balance to 80% of the home’s original value). Depending on the type of loan, there are different ways PMI may be structured — it could be a monthly premium, a one-time upfront premium, or a combination of both.

6. Homeowner’s Association (HOA) Fees

If you live in a community with a Homeowner’s Association (HOA) — such as a condominium, townhouse, or gated community — you might be required to pay HOA fees. These fees go toward maintaining common areas, landscaping, and providing amenities like pools or gyms.

HOA fees can be a fixed monthly fee or an annual fee, and they can vary greatly depending on the community. In some cases, your lender may include these fees as part of your monthly mortgage payment, in which case they are also paid through your escrow account. It’s important to understand your HOA fees upfront, as they can significantly impact your monthly housing costs.

Putting It All Together: Understanding Your Monthly Mortgage Payment

Now that you know the key components that make up your mortgage payment, you can see that it’s not just about the amount you borrowed. Here’s a recap of what you’re likely paying for each month:

  • Principal: The amount you borrowed for the home, which is gradually paid down over time.
  • Interest: The cost of borrowing the money, decreases as you pay down the loan.
  • Property Taxes: Local taxes that help fund community services.
  • Homeowner’s Insurance: Insurance to protect your property from damage or loss.
  • Private Mortgage Insurance (PMI): Required if you put down less than 20%, protecting the lender in case of default.
  • Homeowner’s Association Fees (HOA): Fees for maintaining shared community spaces and amenities.

Understanding these components can help you get a better idea of how much home you can afford and where you can make adjustments to improve your overall mortgage terms. For example, paying down your loan faster can reduce your principal and lower the amount you pay in interest. Additionally, making a larger down payment can help you avoid paying PMI, which will lower your monthly costs.

If you’re in the process of buying a home or refinancing your mortgage, understanding these components is an important step in making informed financial decisions. Knowing where your money is going can help you assess your options and set you up for long-term success.