So you are thinking about buying a house, or maybe just refinancing your current home. So you go to the bank (or Credit Union) either online or in person to apply for the loan. You’ve done your part, filling out all the paperwork. Now it is the underwriter’s turn to do his work. But what is he looking for? His job is to determine your credit worthiness. To do this he will look at three C’s: your collateral, your capacity, and your credit.

Collateral. In most cases, the property you are taking the loan out for is the collateral for the loan. In case of default, this is what the lender has to sell to recover their losses. They will look at the value, the marketability, and the condition of the property. The loan officer will also look at the money you have available for down payment, closing costs, cash reserves and other assets you may have.

Capacity. Next, the loan officer will look at your capacity to pay off the loan. He will look at things like your gross income(in relation to expenses), your employment history (do you have stable employment), and length of time at current / past residences (do you move around a lot). He will look at your debts that may affect your ability to repay a loan. He wants to know that you have the money available to pay a monthly loan.

Credit. What is your credit history – how have you handled loans and credit in the past. Do you use excessive credit? Have you paid off other loans? Can you handle additional debt or will it become a burden?

After looking at your collateral, capacity, and credit, the loan officer will make a determination whether or not you will get the loan. The better your collateral (the lower the loan amount is to the estimate of the collateral the better), the greater your capacity (earnings exceed expenses), and the wise use of credit in the past will all work favorably toward you being accepted for a loan.

If you have specific questions, you should talk directly to a banker; each financial institution will have different parameters for approving loans. But by knowing what a lender looks for in general can show you areas that you need to address before applying for a loan, and whether it is the right time for you to be applying for a loan. It will also help you be prepared to answer any specific questions a lender might ask.

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The other day my wife was talking with some of her girlfriends and they were talking about houses. One of them made this comment that just surprised my wife completely. This women said that her family did not own a house (they rent one) because they did not want to pay real estate taxes. My wife couldn’t believe that comment and I know I can’t.

Now there are many good reasons to not own a home and to rent. Depending on particular circumstances, renting may be a financially wise choice. But to make a decision to rent verses buy because you don’t want to pay taxes is not a good reason. It is wrong financial thinking. In the first place – they are paying taxes, albeit not directly. The landlord / owner of the house, his goal is to make money. When they come up with a price for rental, it will include covering the mortgage payments and taxes. So the price of the rental will have those items, among others factored in. Her family is paying the taxes, but on a monthly basis to the landlord verses a lump sum to the city.  

Although I am surprised at thinking like this, I know I shouldn’t be. Everyday people are making wrong financial decisions out of ignorance, foolishness, or just carelessness. I do not want to be one of those people, and if you stopped by today to read this, hopefully that means you also do not want to be one of those people. It was a good reminder for me to keep learning and growing in this area, so that I do not fall into traps that have caught others by surprise. Let’s keep learning together!

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The other day I actually walked into a local branch of my bank (I mentioned that in a prior post – I hardly ever do that!). They had a PNC Bank Homebuyer’s Guide that intrigued me.  I’m sure it was there to get you to become interested in one of their loans. Anyway, I thumbed through it and there was some interesting things. Today’s post is based on what they said (plus some personal observations) to look for as you do a walk through of a property you might purchase:

• turn on lights, ceiling fans. Do they work?
• flush toilets, turn on faucets
• Run appliances (stoves, dishwashers, garbage disposals, etc.
• Run the furnance, central air
• Open and close doors (including garage doors)
• Open and close windows
• move things (people try to hide carpet stains, cracks with furniture, etc.)
• check ceilings, walls for cracks
• look for mildew, dampness (especially in basement)
• look in the attic or crawl space
• ask when things have been replaced last (water heater, furnace, roof)
• look around the yard – animal damage (ants, mice, moles, gophers, etc.)

It is amazing to me that people do not check things out. We don’t think twice about test driving a car before we buy it. Think of walking through a house as a test drive. Try everything you can. Ask every question you can. If you use a realtor, press them on details. If you can afford it (or you have a friend who is a contractor), have a contractor walk through the house with you – his/her unemotional eyes can catch a lot of things you might miss (floors aren’t level, etc.). If you know a house inspector, ask them for what they look for when they do house inspections – see if you can get a copy of their inspection checklist for your reference.

Use all your senses – check for smells, listen for sounds (like the train that comes through at midnight!). Even though homes are a “bargain” right now, it is no bargain if you buy the wrong house, or pay the wrong amount for the right house. Be diligent. As always, leave your tips and suggestions in the comments!

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For work I was at a local branch of PNC Bank, which is also my personal brick and mortar bank. Now I hardly ever have to go inside a bank what with ATM’s and on-line banking. So I was just curious and looked over their information for fun and they had a “Preparing for Homeownership Qualifier Worksheet” booklet that piqued my curiosity.

FYI, PNC is a regional bank that operates in 17 states, mostly in the East, but also has branches in the Midwest. It is currently the fifth largest bank in the U.S. Anyway, I have my loan through Wells Fargo, a fixed rate 30 year loan at 4.75%. But I was curious to see what a bank would tell you about qualifying for a loan.

After some introductory fluff, they talk about the down payment you will need. They state that lenders require home buyers to contribute funds toward the purchase of a home. So far so good. Then they tell you that the down payment can be as little as $500, and that no down payment is required for VA loans, and that there are down payment assistance programs available. Isn’t that kind of thinking by banks and individuals part of what got us into the housing mess we are in now? I was pretty surprised. Now maybe they just say that and there qualifying is stricter, but I was shocked that they would say things like that in print. Generally speaking, I believe personally that if you don’t have at least a 20% down payment, you should not be buying. Of course there could be exceptions, but not many.

The material then went over some of the costs of owning a home, things like monthly mortgage payment, taxes, insurance, repairs and maintenance, utilities, furnishings, etc.

Then came the qualifying worksheet. It was a pretty simple do it yourself check. Basically, they want you to have only 28% of your gross monthly income going toward monthly housing expenses (mortgage, taxes, insurance). They also want your total monthly debt to be less than 36% of your gross monthly income. Again, I think those numbers are high. Currently, my monthly housing expense is 18% of my gross monthly income. My total recurring debts is the same (only have a mortgage – no car or credit card debt).

My Mom, before she retired, worked in the lending department of a bank. As she has reminded me more than once – thae banks goal is to make money off of you; your job is to not let them! The more that they can get you to borrow, and they will try to get you to borrow more than you should, the more money they make.

You need to go in knowing what you can comfortably afford, not what a Bank or Credit Union or whoever tells you you can afford – even it its printed! Sadly, even after the crash, things haven’t changed that much in banking.

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After a recent storm I went outside, and there again were a few pieces of shingle lying around. Not a good sign! I took a close look at our roof – no apparent bare spots. I also took a flashlight up into the crawl space in the attic – no signs of water damage or leaking.

It looks like our next house project will be the roof. I will probably get some estimates this spring although I would rather wait to do the roof until next year. It looks like I will be doing regular checks up in the attic to make sure we are not having any damage.

I do have a budget for repairs / improvements, but roofing will be more than I have saved. Another attack on my emergency fund? I hope not.

The joys of home ownership!

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After my last post, I did a little more checking on Zillow.com , I thought I would see how the price compares to since I purchased the house. I am still doing okay – the value of the house is still higher than when I bought in 2004.

One of our readers mentioned that zillow can be quite volatile in its pricing, and I agree with that, especially in the short run. What I am looking for is trends – is my area trending up or down over the past year. So for me, zillow is okay as a barometer.

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I went onto Zillow.com to see what home prices are doing in my area. It was not a pretty sight! I was expecting the market to be down, but not falling like a rock (see graph below). For net worth purposes, I usually change my home price in Quicken only once a year, and I keep it conservative if it’s risen substantially. I might have to rethink that strategy this year – I may reevaluate my house’s worth twice. At the end of June, beginning of July I will see what is happening and decide if I need to change anything in Quicken for net worth purposes. I keep my home price conservatively low, but if prices keep falling like they have I might have to lower the value in Quicken.

It’s a crazy market out there right now! Fortunately, I am not in danger of going underwater, and the purchase price I paid in 2004 is way lower (by about $50,000) than the current Zillow estimate, and my mortgage loan is only around $130,000. I am glad though that I am not having to move anywhere right now!

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Out of curiosity, and in case I need to get a home equity loan (you can tell I am paranoid right now about something else breaking in the house!), I wanted to see what my home’s current value might be. I went to zillow.com and checked out what their estimates were. This last year my home’s value went down 9.4%! Fortunately, since we bought the house in 2004, the house has increased in value by 23%. So we are fortunate that we are not underwater; in fact our house has appreciated over that time span.

Our current mortgage is for only about 67% of the current value of our home, so if we had to (which I am hoping we do not), we probably could get a home equity loan.

I don’t check often, but I do like to go to zillow just to see the trends of our area and what’s happening with housing. It’s not a bad tool to use as you are making financial decisions.

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I scored a B+ according to their test! Over at CNN Money they have a “How Healthy are Your Finances?” quiz that you can take. It focuses on 7 financial areas – this is how I scored in each area:

• House Payments – Good
• Debt Load – Good
• Stock Diversification – Good
• Life Insurance – Good
• Company Stock – Good
• Retirement Saving – Low
• Emergency Savings – Low

It’s a pretty simple test – you either get a good or a low. Each one has a little explanation for how you scored. For instance on retirement saving, they thought I needed more based on my age and income. For emergency savings, if you don’t have 3 months worth of income saved you get marked low.

I disagree with the emergency savings – it’s not how much you save that matters but what your expenses are, plus there are other factors that come into play for me:

• I’ve been laid off before so I have some experience of what my needs would truly be. It’s definetely not 3 months worth.
• I know how to work hard at getting a job, plus I have skill sets that are useful for temporary agencies, etc.
• My wife is not working now, but she could in an emergency.

But a B+ is not bad. Anyway, it’s not a bad tool if you just want a quick review. Just know that there are many factors that go into financial decisions and just because you have a different mindset, it doesn’t mean you are wrong!

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When I refinanced our home mortgage last month, the company insisted that they do a one time escrow for my local real estate tax that will be due in April. They set aside $800. I received my real estate tax bill 2 weeks ago for $618.  So I emailed the mortgage company to find out if they wanted me to send a copy of the bill. The reply came back – wrong “division”, they do not handle that, call this number. So I called that number – they said fax info to their tax department. I did that – heard nothing. After a week I called back – I got a really helpful individual this time. At first, she couldn’t find any escrow account! Then she found it and it was $0. Finally, after about 20 minutes on the phone, she discovered that the mortgage company had sent the escrow to an outside servicing company to pay the tax bill.

So after getting the number of the servicing company I called. And I called. And I called. Finally I got someone – they had already sent the payment in – all $800. So I then called our local real estate tax collector. Yes he had received the $800 check; but because it was for $800 and not the $618 owed, he had to send it back (they are only allowed to accept checks for the exact amount he said).

So then I had to call the servicing company again. And again. When I finally got a hold of the correct individual, I went through the whole story. She said they would send the correct tax amount right out, and that I would get the remainder by check in the mail, and that I should have it by Monday (Feb. 23). It is now Wednesday – no check. So tomorrow or Friday I will again hunt down the missing money.

I did not want an escrow account, even a one-time escrow for this very reason. Ugh! Now if it were me having their money, I would be getting “courtesy” calls and emails on a daily basis, plus I would be paying interest.  Customer service is such an oxymoron. It’s amazing how attentive everyone was until I signed the deal – then it’s good luck getting help!

Oh well. At least it gives me something to blog about!

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