Bob Kieber
Special to the Daily

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October 6, 2012
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Financial Facts: Simple mortgage math, do your own calculations

Are you thinking about buying a home, car or computer? Are you thinking that it would be nice to have those items tomorrow, but you will not have the cash to pay for them? Most of you reading this article can go out tomorrow and start the process required to get these items, and without doing anything illegal.

Credit, according to many, is the best thing since compounding interest and sliced bread. Why not get what you want using someone else's money. Get a mortgage, car loan or credit card and get that immediate satisfaction of owning something your cash in the bank would not let you have. Credit is the ticket, and if you meet the minimum criteria to obtain it, credit can get you what you want, at a price.

Now after all that has been said the next step is to apply for credit. There are thousands of ways to get credit, excluding Guido's midnight loan service, and most of them are legal. And all of the places that loan money out have the same basic operating procedure, get to know the potentials borrowers personal financial history to see if they are credit worthy.

Generally, the first thing all lenders do is get a credit report on you. This document is your personal financial history and physical. It shows if you have had history is the past and present. It shows if you have paid your bills on time and if you have been bad and not paid on time. It shows if you owe Uncle Sam for back federal taxes and it may even show if you been sued and lost in small claims court. These reports can show a potential creditor if you have been naughty or nice and if Santa will be granting you the wish of obtaining credit.

After your credit is known to the lender, they will want to know how much money you make in a month and year. In the case of Ms. Brooke Trout, she makes approximately $5,000 a month, $60,000 a year. Ms. Trout has only one small debt, and that is a college student loan, and her monthly payment is $155. She has no other debt, and no other credit. Ms. Trout wants to buy, or as I like to say, invest in a small, but livable condo. The purchase price is $145,000. She is planning to borrow $130,000. The down payment is coming from an inheritance she received a couple of years ago when a favorite, but not too rich relative died leaving her some cash. Her estimated monthly payment of principal, interest, taxes and homeowner's association fee all add up to $1,080.

Now in this past paragraph I have thrown out a lot of numbers, so here is how I see the picture. The loan-to-value is 89.655 percent. That is the loan amount divided by the purchase price. Her debt to income ratio is 24.7 percent. This is her minimum monthly required payments divided by her gross monthly income. And for some of you, gross monthly income is the total amount you earned during the month before and tax and the like are deducted.

So you now know how to figure debt-to-income ratios and loan-to-value ratios. You also know that the better your credit, the more likely you will be approved for credit. All you need to know now is what these ratios mean to a lender. Simple, the lower the debt-to-income ratio and the lower the loan-to-value ratio, the better for you. Figure that if your debt-to-income ratio is over 50 percent, your chances of getting a mortgage is slim to none. If your loan-to-value is 90 percent, you better have great debt-to-income ratios and even better credit scores.

For you to really understand if you can qualify for a mortgage on that dream home you need to discuss your personal financial situation with an experience mortgage professional. They should always be willing to show you how much your current financial situation will allow you to buy and how to improve your situation if you need some counseling.

For answers to your mortgage related questions, call Bob Kieber at (970) 453-4700 or email him at rkieber@centennialbanking.com. Bob is a local mortgage lender with Centennial Bank. He has 30-plus years of professional experience in real estate, finance and investments, and is a longtime resident of the High Country. Member FDIC, Equal Housing Lender. NMLS Bank #401640 Broker #289610. For tax benefit information please consult with a professional tax advisor. The opinions expressed are those of the individual, and do not necessarily reflect those of Centennial Bank.


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The Summit Daily Updated Oct 6, 2012 12:24AM Published Oct 6, 2012 12:22AM Copyright 2012 The Summit Daily. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.