If you are even remotely contemplating an application for a mortgage, you need to think about how your monthly bills stack up. Are you paying too much in extraneous debt such as credit cards, automobile loans, or equity lines on your current home? Do you have a second mortgage with an interest rate that is sky high so all you can afford to pay is the minimum interest payment? That is scary. In today's market, it is easy to find yourself underwater on your mortgage. Let me walk you through some of the steps you can take to avoid over extending your credit.
Take a look at this article posted on the Fannie Mae website. Dave Ramsey is renowned for counseling people who need credit help. Fannie Mae is a Government Securities Agency (GSA) that sells loans on the secondary market to investors. The purpose of Fannie Mae and Freddie Mac (the other most popular GSA) is to buy mortgages and sell them as securities in the public securities market. When they are inundated with sub-prime mortgages, our markets can become unstable and lead to the situation we had in 2008 that brought down our economy. It only takes a few weeks to go through Ramsey's program, but it will save you a lifetime of credit woes. Now take a look below at an example I came up with based on what Ramsey and other financial guru's might tell you.
The first thing you should consider when either purchasing a new home or refinancing your current is where is all of your money per month going once you receive it? Is it being saved at least 10%? Is it being given to charity at least 10%? Can you comfortably live on the 80% you have left? Now, this formula is typically what a financial planner or religious leader may tell you in a sermon about finances. Honestly, it works. If you are unsure how it does, let me spell out the actual figures for you:
1. Say you make $4000 per month
2. That is a comfortable $48,000 per year in just gross earnings
3. Ten percent of that is $4800 - you won't ever see it until you need it if you use automatic deposit features your bank or employer offer
4. Ten more percent is another $4800 to support your local charities - you WILL see that as a tax write off on your IRS Personal 1040s. This is a bonus you didn't think about, huh?
5. $38,400 is what you are left with in actual cash on hand (in a non-income taxed world) - now all of a sudden $43,200 is what your taxable earnings are before factoring in other write offs such as exemptions and maybe even some self-employment income for jobs you do on the side to supplement your yearly income... chances are pretty good now that you will get a refund from Uncle Sam that you can save for later or pay down some of your bad debts
So what do all of these figures mean? Simple - if you have $38,400 left per year after saving and doing your charitable justice to humankind, you can live pretty comfortably if your debts are minimal. (Obviously, if you are married and your spouse brings in more bacon than you do, just add his/her income to yours and work out your formula to find your personal number, but you get the picture here). Controlling your debts is what it takes to maintain financial stability.
In a world that is full of desires for things that cost money - cars, homes, designer clothes, jewerly - you can rack up a large credit debt bill. Even if you live responsibly and within your means, credit card debt can be a huge temptation to make like Wimpy from the classic Popeye cartoon series and "gladly pay you Tuesday for a hamburger today." We need to break that statement down in the next paragraph to see what that means exactly... so here we go!
Credit is something that you should use sparingly and only in times when cash just isn't the best option. For instance, if you are buying gas for your car - most gas stations now require prepayment - you can get up $100.00 per pump transaction per visit to a station. With rising prices, I hope you have a small tank! I don't know about you, but I don't carry that kind of cash with me at all times. Use a credit card, but watch your limit and alternate cards if you have more than one. If you have one with a higher limit, use it the most. But here's the kicker, you have to pay the hamburger man TUESDAY with CASH from YOUR income stream if you buy a hamburger today. Don't wait until Wednesday, Thursday, or Friday. If you don't immediately pay back the credit you used, your credit score suffers. But here's another kicker, keeping balances at 30% of your limit or less is actually better than paying it off completely. Funny how the credit algorithm works...
Now, after Wimpy pays the man for his hamburger, what does he do next? Easy - he gets another one. But this time, he pays cash because it is after pay day. Do you see where this is going? Wimpy has cash to spend. He's not on credit because he doesn't need it. Never use credit unless you absolutely need to. This is where many people run into trouble. "But what about people who have no income and are just trying to live?" I'll answer that question next.
If you have experienced credit shock and (hopefully) avoided bankruptcy in the past, don't be turned away. It may still be possible for you to obtain a credit consolidation loan. If you have late payments because you lost your job, or you had to obtain a few extra credit lines to make ends meat - you're not alone. This happens in times of poor economy, and when mortgage rates increase, these types of borrowers emerge as primary customers. They are known as sub-prime borrowers because their credit is just that - sub-prime - or sub-par for you golfers out there (but in this case, below par isn't good)! We want to work with you to provide a means for getting out of the sub-prime market and into the prime market. It may take some counseling or patience - or both - but it can be done. But obviously, you have to be gainfully employed for this to even be considered.
So remember this guy -
... and pay up on time!
As always, tell us your thoughts in the comments below. I'd love to hear them. I want you to be as informed as you can be, especially if your credit history isn't that great. Loans are there for you to consolidate debt, but you may have to do some work first to get one. We all want to own our own homes, and cash really isn't an option for all of us. So... here's a great example of when to use credit! Click the button below if you're ready to talk to one of us about this topic directly...