Purchasing Power & How to Increase It

To get the most for your money when you buy a new home, your finances must be in good order. Even if you're months away from shopping for a new home, take time now to shape up your household finances. Here are a few tactics to help you.

  • Reduce your debt. Being overextended may work against you when you apply for a mortgage. Try to channel more of your income away from spending and toward paying down outstanding debt. For instance, hold off on major purchases or make do with your old car a little longer. 
  • Check Repair & Credit Building. Your credit report will get careful scrutiny when you apply for a mortgage, so it’s a good idea to have a credit worthy profile beforehand. Under federal law, you can obtain a credit report from each of the three national credit-reporting companies. There are things in life worth paying for on a monthly basis and this platform right here is one for starters. EditCredit help your scores to become attractive unto lenders nationwide.
  • Save more for down payment and closing costs. More cash on hand means greater flexibility in your financing options. For example, with a larger down payment you may not be required to pay for mortgage insurance.
  • Additional self-emploment income & How to solidify it through Business Entity establishment. Most people overlook that concept of making additional income adjacent to their W-2 wage income. A high percentage see it as extra cash or layman's term "matress money". Any addtional self-employment income that you generate from Uber, Lyft, Instacart etc. can increase purchasing power. Let's peal back the onion layer a little more in regards to tax benefits & tax advantages.                                    Note: When it comes to paying little to NO TAXES, establishing yourself as a business entity is key. Operating your business on a substandard tier such as a sole proprietor, gridlocks you to a double-taxation of 15.3% in self-employment tax and another 10 to 37% in income-tax based on how much revenue you generate.              A sober-minded business owner will structure their business efficiently & acquire a tax professional along the way, so he or she can yield as much money as they desire, in order to pay little to NO TAXES on it at the beginning of a new calendar year.

Once your finances are together and you're ready to start shopping for a home, contact Mr. Cooper® htps://www.mrcooper.com to get preapproved for a
Home Mortgage. They are a trusted lender of ours who has helped numerous renters to buy a home. A preapproval shows agents and sellers that
you're a serious buyer, and may give you an advantage over buyers who are not preapproved. 

The importance of the 43% Debt-to-Income ratio

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.

  • To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.  For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.)
    If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.)
  • Evidence from studies of mortgage loans suggest that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. 
  • The 43 percent debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still get a qualified mortgage.
  • There are some exceptions. For instance, a small creditor must consider your debt-to-income ratio, but is allowed to offer a Qualified Mortgage with a debt-to-income ratio higher than 43 percent. In most cases your lender is a small creditor if it had under $2 billion in assets in the last year and it made no more than 500 mortgages in the previous year.
Larger lenders may still make a mortgage loan if your debt-to-income ratio is more than 43 percent, even if this prevents it from being a Qualified Mortgage.
But they will have to make a reasonable, good-faith effort, following the CFPB’s rules, to determine that you have the ability to repay the loan.


Federal tax-debt vs Homebuying

If you owe tax debt to the IRS, your dream of homeownership may be on the line. Underwriters & knowledgeable tax professionals can advise you on how to
legitimately position yourself to get approved for a mortgage if you owe federal taxes. In fact, this is one of the most common mortgage questions we hear.

Example Question:
"I am looking to buy a new home, but I owe the IRS approximately $16,000 for tax years 2018 and 2019. I have been told that I need to pay off my delinquent tax debt before I can apply for a mortgage. I have $20,000 in savings, but I was hoping to use that money as a down payment to purchase the house. Is there any way to pay part of my tax debt off and qualify or do I really need to pay it all off?"

Answer:
You do NOT need to pay off the entire tax debt that you owe in order to qualify for a mortgage. Depending on the type of mortgage you are applying for - FHA, Fannie Mae or Conventional - you will need to meet certain requirements. Following are breakdowns on what you need to do to qualify for each loan type below:

Federal Tax Debts & Liens

 Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the lien holder to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments. The Mortgagee must include the payment amount in the agreement in the calculation of the Borrower’s Debt-to-Income (DTI) ratio. The lien holder must subordinate the tax lien to the FHA-insured Mortgage.”

  1. Call the IRS and set up a repayment plan with them. Make sure you ask them to send you a copy of the repayment agreement that specifies the total amount you owe and what the monthly payment amount will be. Keep the letter in a safe place and give it to your lender when you apply for the mortgage.
  2. You MUST make THREE CONSECUTIVE payments ON TIME, as agreed to in your repayment plan BEFORE you apply for an FHA loan. So, if you make your first payment on January 1st, the second on February 1st and the third on March 1st… you can apply for the loan on March 1st.
  3. When you apply for the loan, make sure to inform your lender about the repayment agreement and to include the monthly payment amount in your liabilities on your loan application. You will need to give them a copy of the repayment agreement you received from the IRS along with proof of the payments you’ve made. You can obtain a payment history from the IRS online or call them and have them send it to you.
  4. *This step is ONLY applicable if your Federal Tax Debt has resulted in  Federal Tax LIEN being filed.* You will need to contact the IRS and work with your lender to obtain a Subordination Agreement from the IRS. A subordination agreement simply means that the lien filed by the IRS will be secondary to the FHA’s lien. So should you sell the house or be foreclosed on - the IRS will get paid on their lien only after the lien placed by FHA is paid.

What the Conventional - Fannie Mae guidelines say

  • “When a borrower has entered into an installment agreement with the IRS to repay delinquent federal income taxes, the lender may include the monthly payment amount as part of the borrower’s monthly debt obligations (in lieu of requiring payment in full) if there is no indication that a Notice of Federal Tax Lien has been filed against the borrower in the county in which the subject property is located.
The lender obtains the following documentation:
  • An approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due; andEvidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must have been made prior to closing.”

What this means to you:
If the IRS has filed a Tax Lien against you in the county where the subject property is located - you WILL need to pay off the entire Federal Tax Debt and have the lien released prior to applying for a mortgage.

If there is no federal tax lien filed and you just owe the IRS lots of money, we can make this work:

  1. Call the IRS and set up a repayment plan with them. Make sure that you ask them to send you a copy of the repayment agreement that specifies the total amount you owe and what the monthly payment amount will be. Keep the letter in a safe place and give it to your lender when you apply for the mortgage.
  2. Apply for a mortgage the same day you set up the repayment agreement with the IRS. Fannie Mae only requires that ONE payment be made before closing!                      So, there is no need to wait for the first payment to be made under the agreement, as long as you will make that first payment before your loan closes.
  3. Again, remember to tell your lender about the repayment plan and to include the monthly payment amount in your liabilities on the loan application.

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