by Jay Robins
Mortgages the Zen Way is a holistic approach to achieving money wellness. To accomplish this, we need to look at the different parts or pieces of your life pie in order to become empowered. I use the acronym DICE which stands for Debt, Income, Credit and Equity.
Debt. All items that appear on your credit report including what your mortgage payment, real estate taxes, hazard insurance, HOA, and mortgage insurance will be or what they already are. That total number for debt compared to your income is called your Debt to Income Ratio. (When reviewing your budget, it’s important to also include other expenses, e.g. groceries, entertainment, gasoline, cell phone bill, etc.)
Income. There are two types of income: Gross and Net. Gross is money you earn before taxes are taken out. Net is the money you get after taxes or expenses are taken out. If you are a W2 employee and receive no other income, this is pretty straightforward. If you get paid with a 1099 or you are self-employed, that takes a little more getting into. Self-employment, commissions, bonuses and overtime are averaged over two years of consistent employment. In my experience, income is the most important of the four main ingredients in DICE.
Credit. Credit is not only your credit score but also your credit history. If your score is below 620, that says most likely there are things on your credit report unresolved that just need to be addressed. Usually, by addressing those issues within a matter of months (sometimes weeks), the score can go above 620 giving you the ability to get approved for a mortgage. If your score is less than 760 then your credit is less than perfect. A great way to ensure your score is at its highest is to make sure your credit cards have balances that are less than 30 percent of the credit line. By doing that, it can increase the credit score up to 20 points per account. In some cases that same technique can be the difference in getting a better interest rate by 1 percent.
Equity. Equity is the difference between how much the property appraises for and how much is owed on a mortgage. If no mortgage is owed then it has 100 percent equity. On a purchase, an FHA government mortgage is typically a down payment of 3.5 percent, and on a conventional mortgage it can be as low as 3 percent but more common between 5 to 20 percent. On a cash out refinance, the equity can also change as a result of your debt, income and credit. The term we use is LTV—loan to value of the home.
Steps to Take
1. Review a budget worksheet. Visit MortgagesTheZenWay.com/dice to download the free spreadsheet. Compare your income to all existing debt, including new debt with your new mortgage (mortgage payment, taxes, insurance and HOA if applicable). The intention is to see where you stand with your numbers and what you can afford.
2. Review your credit report. Pull it on your own and I’ll review it for you at no cost or I will pull the credit for you and do the same thing. The intention is to review any possible issues on your credit to ensure you have the highest possible credit score that will result in the lowest interest rate, which results in extra cash that can be going into savings or retirement. Good credit equals wealth creation.
3. Have a clear game plan of your next step. In some cases it may be to hurry and wait.
For more information and guidance, whether you are 15 days away from closing or 12 months, and a complimentary consultation valued at $300, call 954-612-8192, email [email protected] or visit MortgagesTheZenWay.com. See ad page 52.