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Mortgage Prequalification

How Much Can You Qualify For - Self Test

Net Worth Worksheet

Imagine you have just completed a search that included hundreds of hours of looking at the exteriors and interiors of houses. You have sized up siding, reviewed roofing and perused the petunias. And finally, you have found the house of your dreams. Now imagine that this house of your dreams costs much more than you can afford.

If you are house hunting and have not done an important piece of homework, you could be in for this kind of heartbreak. The first thing you need to know when shopping for a home is how much you can spend.

A general rule is that you can purchase a house valued at twice your annual income, but this does not take into account your debts, a large down payment, or other factors which can add to or detract from the amount you can afford.

The purpose of this page is to help give you a more specific idea of what priced house you can afford. It will address what you are worth and what you owe on a regular basis (your assets and liabilities) and what costs you would most likely encounter once you bought your new house. In general, you will be examining the same things a lender looks at when deciding how large a mortgage you can afford

Completing the worksheet inside this brochure should save time while shopping for a home because it will narrow your choices based on costs. When you finally do talk with lenders, you will have some answers for many of their questions, speeding up your loan's processing.

It should be noted, however, that today many lenders will qualify you in advance for a mortgage, even before you begin to shop for a home. Many lenders advertise this service in the local newspaper, but contact any lender to see if this is possible.

Down Payment

Lenders expect homebuyers to have enough money available to make the down payment (usually up to 20 percent of the asking price for the house) and to pay their share of the closing costs ( 3 percent to 6 percent of the loan amount). You should figure this amount (which will depend on what you decide you can afford) into your home buying budget. The down payment and closing costs are usually made up of money drawn from your total assets.

Private Mortgage Insurance

In the event that you do not have a 20 percent down payment, lenders will allow a smaller down payment - as low as 5 percent in some cases. With the smaller down payment loans, however, borrowers are required to carry Private Mortgage Insurance. Private mortgage will require an initial premium payment of 0.5 percent to 1.0 percent of your mortgage amount plus an additional monthly fee depending on your loan's structure. On a $75,000 mortgage with a 10 percent down payment, this would mean a premium of $338 to $675 for the first year and an extra $15 to $20 a month in subsequent years.

What Are Your Assets?

The first thing you have to examine when deciding how much you can spend on your new home is how much you are worth, taking into account your income, savings, investments and other holdings such as Individual Retirement Accounts (IRAs) or Keogh plans, the cash value of your life insurance, pensions or corporate savings plans, and equity in real estate. Lenders will need this information before deciding to extend you the loan.

Often, the amount you earn may not be as important as how you earn it. Bonuses and commissions can vary greatly from year to year, and lenders are reluctant to depend on them if they make up a large part of your income. There are similar problems when a large portion of your salary is based on overtime pay, and you rely on it to qualify for the loan. To get a realistic view of what your income level actually is, average your income (including bonuses, commissions and overtime) for the past two or three years.

As a last resort, pensions and corporate thrift plans can provide another source of down payment money. Most plans or policies give you the option of either withdrawing your money with no repayment or borrowing against the cash value. Though it is not the best policy for most homebuyers to borrow from these sources in addition to borrowing mortgage money, they can often get rates substantially lower than those on many other kinds of loans. Remember - if you borrow against the cash value of your life insurance or employee thrift plan, you will be making principal and interest payments for these separate from your mortgage. You should estimate these payments under installment loans on the worksheet inside.

While turning your savings, investments and other holdings into cash (making them "liquid"), remember that you will probably have to pay tax on most of it. One source of tax-free money often overlooked is a gift, or money given by a parent or other relative that need not be repaid. A person may give another person up to $10,000 per year without either party being taxed. Your parents, for example, could give you and your spouse up to $40,000 tax free.

Liabilities

Your liabilities are those expenses for which you are responsible each month. These include outstanding loans, such as student, auto, personal and so on, as well as credit card balances. When calculating your liabilities, use the entire balance for your credit cards, as if you had to pay them off entirely this month. That way, you give yourself some breathing room should you run up an unusually high balance during your mortgage term.

You should estimate these payments under liabilities on the worksheet.

Emergency Funds

It is always wise to put a little money away "for a rainy day" - especially when you are paying off a mortgage. If something arises such as unexpected medical costs or substantial auto repairs, you would want to be able to pay those expenses without jeopardizing your ability to meet your mortgage payments. Most financial experts suggest that you always have six months income on hand in case of emergency.

Annual Income

When calculating your annual income, remember to take into account all sources. You may, for example, get dividends from investments, alimony or child support payments. Calculate your annual income on the following page.

Annual Expenses

This list should get you started, but you may have special expenses that are not listed here. Remember that when you buy your house you will no longer have to pay rent, and your utilities costs will change. You can use this money for your mortgage payments or other operating costs associated with your new home.

The Costs of Homeownership

Of the costs of homeownership, the ones listed on the next page are the most important. Homeowners insurance premiums usually run about $300 to $500 per year, and property taxes and maintenance costs will vary, of course, depending on the size, age and condition of your new house. Estimates for the costs of utilities, maintenance and improvements can be obtained from Realtors, local utility companies and others.

Some homebuyers will also have an additional cost of homeownership if they are buying into a condominium or a co-op. Condo and co-op fees are additional amount usually paid monthly on top of the mortgage payments. Some homeowners will also incur a home owners association fee for their block or neighborhood. These fees vary greatly from location to location.

Net Worth Worksheet

Assets and Liabilities Annual Expenses
Rent _______
Add up your assets and subtract your total Food _______
liabilities. Clothing _______
Transportation _______
This is your net worth. Medical/Dental _______
Insurance Premiums
Assets Life _______
Cash on Hand _______ Auto _______
Savings Accounts _______ Renters _______
Cash Value of Stocks _______ Other _______
Mutual Funds _______ Tax Payments _______
Bonds _______ Utilities _______
Life Insurance Cash Value _______ Savings _______
IRAs _______ Tuition/Day Care _______
Keogh Plan _______ Alimony/Child Support _______
Employee Savings Plans _______ Loan/Charge Acc. Payments _______
Pensions _______ Recreation/Entertainment _______
Real Estate _______ Other _______
Other _______ Total Annual Expenses $_______
Total Assets $_______
Estimated Operating Costs
Liabilities Homeowners Insurance _______
Installment Loans _______ Property Tax _______
Credit Card Balances _______ Maintenance/Improvements _______
Student loans _______ Utilities _______
Other Debts _______ Condo/Co-Op/Homeowners
Total Liabilities _______ Association Fees _______
Other _______
Subtotal Your Total Liabilities Total Estimated Operating
from Your Total Assets. Costs $_______
This is your net worth $_______
Add Your Annual Expenses
Emergency Funds Operating Costs And Then
(Six Months Income Sug.) _______ Subtract Them From Your
Annual Income. $_______
Subtract Your Emergency Funds
From Your Net Worth. This Add back in the costs for
is the amount you have for rent, utilities and
down payment and closing renters insurance. You
costs. $_______ will be able to spend this
money on your new house.
Annual Income $_______ The total is the amount
Gross salary _______ you can spend per year on
Alimony _______ your new house. $_______
Child support _______
Interest _______ Divide this amount by 12
Dividends _______ to get a monthly mortgage
Tax refunds _______ payment amount. $_______
Other _______
Total Annual Income $_______

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