Before buying that first or next home, there are 3 things you should really do before calling your real estate agent or mortgage broker. It is important to understand where you are financially before your heart becomes set on that perfect house. By figuring out your net worth, your monthly budget, how much debt you pay every month and what your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios are you will have a better understanding on how much you can afford on that new house.
1) Net Worth
Simply stated your net worth is the difference between your Assets what you own and your Liabilities, what you owe. It is important to analyze your net worth prior to jumping into the house buying market. One it gives you an accurate look at your current financial situation, and two when it is time to talk to your mortgage broker or lender you will already know the answers to their questions. It is better to be aware of your financial information prior to this meeting so the feedback you receive will not come as a complete surprise. Knowing your net worth will give you a good indication of how much of a down payment you will be able to afford.
2) Budget and Debt Payments
If you haven’t done so prior to buying your house, you should at least create a list or budget of your monthly finances and debt payments. It is good to know how much of a mortgage payment you can realistically afford. A monthly statement of your expenditures and debt payments will give you a breakdown of where your money is being spent. Once you know how much you spend on heat, electricity, cable, groceries, and all those monthly expenses that seem to creep up on us, you can see what kind of mortgage payment will fit comfortably into your budget.
3) GDS & TDS
Almost always lenders will use two methods to determine what you can afford as a monthly mortgage payment. The GDS determines the monthly housing costs as a percentage of your total gross monthly income. Your total housing cost payments can not exceed 32% of your gross monthly income. These costs usually include principal and interest of a mortgage, taxes, and heating expenses. For example if you paid $1000 monthly mortgage payment (Principal & Interest), with $100 for taxes, and $100 for heat, you pay $1200 total monthly housing cost. If you make $5000 a month in gross income your GDS would be $1200/$5000 = 24%. The TDS is an expansion of the GDS, along with monthly housing cost payments all other debts such as loans and credit cards are also considered. In this case your TDS can not exceed 40% of your monthly gross income. Taking our last example if we add $500 a month in other debt our TDS would be $1700/$5000 = 34% As you can see there is a lot of pre-work before you decide to hit the pavement. It is always a good idea to sit back take an hour or two and figure out where you are financially before talking to that mortgage broker or real estate agent. It may save a lot of people, a lot of time or you maybe very happy to learn you can afford more than you expected.
The least unpleasant and expected thing in our financial life is called DEBT. To be honest, most people would not want to fall into debt trap in the first place, but very challenging financial situation these days may put less earned individuals to leave with no choice but to have a debt in one degree or another. Debt can do a good when it is properly and strictly managed, but in most cases, that is not how it is going. Credit card usage may often exceed to those less important purchases, at most of the time, they do not need to purchase it in the first place. Perhaps people may think they only need to pay fractions of what they have spend on a monthly basis, but they often not realize that many credit card providers charge less noticeable rather big interest rate over Central Bank’s official interest rate. And the amounts multiplies every month and most people only realized this when they have securely trapped over seems never ending debt payments. People with multi credit cards often fall into this situation with multi payment needs to be taken care every month, and before they realize, irritating and annoying phone calls and reminders from debt collection agencies have been on their back all the time. When these things happened, perhaps debt consolidation is the only way out for them. Why is this so? I will tell you why.
When you deal with debt consolidator, they will offer you debt recovery solutions as your immediate finance remedial actions to take. With these solutions, you will definitely be freed from those annoying reminder calls since all those calls will no longer there. Why? It is because all those debts have been settled by the debt consolidator. So you will only have a single monthly payment to be settled every month with lowered interest rate which will significantly improve your credit score.
You can use the Money program to create a budget. By using Money for budgeting purposes, you can compare your actual spending to your budgeted spending. You use Money’s Budget Planner tool to set up a budget.
1. Display the Budget Planner window.
Click the Planner link, and choose Budget Planner. Money then displays the Budget Planner window.
2. Use the Budget Planner Wizard.
The Budget Planner Wizard steps you through a very thorough process for creating a budget based on your exact income, your long-term savings plans and goals, the possibility of occasional extraordinary expenses, your contractual debt payments for car loans and mortgages, and your anticipated expenses. To step through this planning process, click hyperlinks in the Budget Planner window. Read the instructions inside the windows and, when prompted, provide data by filling in fields. After you finish with the Budget Planner Wizard, you have a complete and very detailed budget.
How do I create a personal financial plan?
Money supplies a Lifetime Planner tool that in effect creates a personal financial plan for you. The Lifetime Planner is a wizard that collects and then analyzes a large volume of personal financial data concerning you and your family, your current financial situation, and your future financial aspirations. The Lifetime Planner starts with a video. Just as with the Budget Planner, read the instructions inside the windows and, when prompted, provide data by filling in fields.
Personal financial planning sounds complex, but it consists of three basic tasks: First, you need to make sure that you manage your day-to-day finances in a way that keeps your financial affairs simple and hassle free. (If you use the Money program to keep your checkbook and other financial records, you are already doing this.)
Second, personal financial planning means identifying and then prudently preparing for long-term financial objectives, such as a comfortable retirement, sending a child to college, or making a major purchase, such as a house. You can spend an enormous amount of time planning for these sorts of major events, but you don’t have to because the planning process isn’t all that difficult. In most cases, you can figure out what you need to do to retire quite easily. Numerous books have been written on the subject.
The same is true of other financial objectives-if you take advantage of well known and popularly discussed tools, it is typically not that difficult to prepare.
The third element of personal financial planning is the mitigation of financial risks where possible. This is perhaps the least understood and most overlooked task of personal financial planning. In a nutshell, you need to make sure that a personal tragedy, such as loss of life of a breadwinner or a serious illness, doesn’t become a financial tragedy.
Obviously, you can’t prevent personal tragedies. Parents die, children get terrible illnesses, and catastrophic events, sometimes forces of nature, destroy property and wreak havoc on people’s lives. However, in all of these cases, you can usually buy insurance that lets you share the cost of these financial disasters with large groups of other people. Then if you happen to become the next unfortunate victim, you will at least receive a claim payment that minimizes or eliminates the financial costs.
How do I plan for a child’s college expenses?
The goal is to save enough money in the years before a child goes off to college to pay for four or five years of tuition.
The first step is to make an estimate about what the child’s college expenses will total. Every year, major U.S. news magazines, such as US News and World Report, provide comprehensive lists of college cost information. Obtain one of these magazines and estimate what college will cost when your son or daughter attends.
After you determine the cost, you then calculate the amount you need to save. The tricky part of saving for college is that you often can’t use investment choices that deliver high real rates of return. In fact, it’s common that you will be saving for college using investment choices that don’t deliver a positive after-tax real rate of return. What this means, unfortunately, is that in many cases you can produce a fairly accurate estimate of how much you need to save for college simply by looking at the total cost of college and dividing this amount by the number of months between now and the time your child attends.
NOTE If you are beginning to save money while your child is still an infant, you may feel comfortable investing in the stock market, which will return a positive after- tax real rate of return.
When you’re struggling with debt and looking for profession help, you have
four options: credit counseling, debt negotiation, debt management, or debt
consolidation. While credit counseling and debt consolidation are both pretty
straightforward services, many people have trouble understanding the difference
between debt negotiation and debt management. This article compares the two
services, and it will help you to determine which service is right for you.
First, ask yourself these questions:
Does My Problem Stem From An Inability To Afford My Debt Payments?
If you answered yes to this question, debt negotiation is probably the choice
for you. Debt negotiation services call your creditors on your behalf and
negotiate lower payments. You keep control of sending out your payments each
month, but your debt negotiation company will negotiate payments with your
creditors that you can afford. Additionally, if your reasons for being unable to
afford your debt payments stem from a circumstance that is not beyond your
control, credit counseling is usually available.
Does My Problem Stem From An Inability To Both Afford and Manage My Debt
Payments?
If you answered yes to this question, then you’re probably in need of the
services of a debt management company. In addition to negotiating lower payments
with your creditors, debt management companies will distribute your payments to
your creditors on your behalf. You simply send them one combined monthly
payment. If you have trouble remembering to pay your bills on time every month,
your credit will greatly benefit from the services of a company that ensures
timely payments.
Debt management differs from debt consolidation in that debt consolidation is a
loan that consolidates all of your debts, and debt management is just a service
that calculates the balance of all of your payments and combines them for you.
With debt management, you still hold all of your original credit accounts.
The most important part of seeking professional debt services is getting
counseling in order to prevent future debt problems. Any professional debt
service should also provide counseling in order to teach you how to stay out of
debt once their services have ceased. Debt services are not meant to be a way
for you to escape your financial responsibilities; rather, they are a way for
you to educate yourself on responsible handling of your credit and debt.