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How to Qualify For Home Financing, and Low Mortgage Rates

If this is your first time buying a home, it can be an anxiety-inducing, confusing journey. But knowledge is power, and with this article, it is my goal that you will become familiar with the elementary rules of home financing. Armed with this new education, and knowing what to do and not to do, will make this journey less rocky for you.

First Things First – Your Personal Finances:

Are you ready to buy? This question will invoke excitement in you, for sure, but there is time for excitement later. Qualifying for, and then getting approved for a mortgage loan is serious business, especially in light of this chaotic economy we are in. Being prepared for this, will inevitably allow you to qualify for more loan programs, with competitive and lower mortgage rates.

You must first answer these questions before you embark on securing a mortgage loan or house hunting.

1) Do I have a solid work history for the past 2-3 years? If the answer is no, don’t despair. Your spouse/partner may be able to help the qualifying, or if the work separation was seasonal, this may not be a factor.
2) Is your Tax Return in order for the past 2-3 years? – If not, see an accountant first and get these filed/corrected.
3) How is my credit? If you have bad credit or no credit, you may qualify for a loan, but the interest rates will be higher. If you are not sure how your credit is, obtain a recent copy of your credit report from each of the 3 credit bureaus: Experian, Equifax, TransUnion. NOTE: Americans are always entitled to a free copy every 12 months, and if you are unemployed, if you collect public assistance, or have recently been denied credit.
4) What are my current debts? If you have large credit card balances, have several open accounts, unpaid student loans, car loans, etc., you could be denied a mortgage because you have what’s called “too much open credit”.
5) What is my banking history like? If you have negative balances, accounts closed by the bank, or several overdrafts, you’ll want to clean this up and pay any balance owed before going for a mortgage. Bring payment receipts with you to prove payment.
6) How much can I put down? Although in many cases this is not required, and low mortgage rates can still be found via programs such as FHA and VA mortgages, putting up to 20% of your own money down as a down payment, can save you from paying PMI – Private Mortgage Insurance, which is a fee that can be both added to the initial loan amount, and added as an extra monthly expense.
7) What other Income Do I possess? If you receive income from dividends, alimony, child support, a settlement, disability, etc., this can help your application if your employment income is low, infrequent, or credit is compromised.

By answering these questions honestly and thoroughly before you begin your search, you will be well prepared to work with a realtor and a lender, and the process will flow more quickly and smoothly because you’ve done this homework. Another bonus is that you’ll have all this documentation organized and won’t have to gather it piecemeal, thereby delaying the process and wasting time.

Ready? Time to Do the Math:

Just because you have met all the above criteria, there is no guarantee that you can afford that new home. Now, it is literally crunch time.

A mortgage lender will begin processing your application by calculating your Debt-To-Income Ratio. This is the difference between what you owe in debt such as credit cards, student loans, car loans, bank loans, rent, and your total income.

Calculate Your Debt-to-Income Ratio:

o First, list your total monthly income. Include salary, commissions, disability, public assistance payments, alimony, child support, settlement payments, dividends and pensions.
o Next, list all your current open debt. NOTE: When listing debt, do not include regular household expenses such as child care, food, and clothing, unless these purchases are made with a credit card.
o Divide your Total Monthly Debt by your Total Monthly income. Many mortgage lenders today prefer to see a Debt-To Income Ratio of 0.36 (known as a score of 36) or lower. The higher the score, the higher your interest rate will be, and therefore the higher your mortgage payment or your down payment. Typically lenders will allow you to surpass this Debt to Income ratio; however we need to also make room for property taxes, homeowners insurance, and possibly Private Mortgage Insurance, and/or condo association fees.
o To find out where you should be with your proposed mortgage loan included, also multiply your Total Income times this general.36 multiplier (to compute your maximum allowed monthly debt based on a 36% Debt-to-Income ratio).
o Lastly, subtract your current total debt from the.36 amount, to find the difference. This is where you should strive to stay under, for your mortgage payment! This will also tell you if you need improvement in this area. Depending on where you want to be, perhaps you should work on paying off some other debt first, increase your down payment, adjust your ideal price ranges for a new home, and/or the total mortgage loan amounts.

Fine Tuning Your Numbers:

Now that you have a rough estimate of what your max monthly debt and mortgage payments should be, you can also fine tune your numbers, once you know other loan parameters. NOTE: Some of these extra parameters may not be known, until a home is found. Some other factors to consider are the terms of the loan, the mortgage interest rate, property taxes, homeowners insurance, condo/homeowners association fees, and depending on the amount of your down payment, Private Mortgage Insurance may also be tacked on to your monthly payments!

Outsourcing and Accounting

In today’s society, outsourcing is a common business practice. Many businesses have begun outsourcing, even accounting firms. In this paper, reasons why accounting firms would want to outsource will be discussed. Then, it will talk about how the Sarbanes-Oxley Act of 2002 (SOX) impacts the issue of outsourcing. Finally, a quick look at a Big Four accounting firm who has taken the opportunity to outsource.

When talking about the issue of accounting firms outsourcing, first we must look at reasons why an accounting firm would want to outsource in the first place. According to CPA Trendlines, there are seven main reasons why an accounting firm would want to outsource. The first reason is because the accounting profession is aging. This means that many of those who are currently employed in the accounting field are getting older and are planning to retire. This then brings in the demand of a fresh, new set of people to take over these positions. The second reason is to outsource the less profitable work. When firms do this, they are able to spend more time and resources are those services that clients notice more, such as consulting work. The third reason why accounting firms outsource is because it makes ‘just in time’ hiring easier. What this means is that many (if not all) accounting firms hire extra people during tax season. Also, many of the full time staff get overworked and this could lead to a higher turnover. With outsourcing, accounting firms leave the ‘just in time’ hiring to those outsourcing firms. This is much easier on the accounting firms because instead of taking the time of hiring many new staff members, they only have to hire one outsourcing firm. The fourth reason why outsourcing is becoming popular with accounting firms is because of the need of everything being digital, it forces standardization. These means firms examine processes more closely, and they are able to make sure everything is exact with the standards. This is considered a hidden benefit. The third reason is because their growth is virtual and not physical, firms are able to take on more clients and not have to expand their physical space, such as new facilities, computers, and staff. The second reason why outsourcing is popular with accounting firms is because the turn around time is faster. In places that work is outsourced, like India, can be 10 hours ahead of time here in the United States. This means that work that is sent out at the end of the work day can be returned by the start of the next work day. Lastly, outsourcing is cheaper than doing the same work here at home. Work that could cost between $20 – $25 U.S. dollars an hour here in the United States would only cost between $10 – $12 U.S. dollars if outsourced. Also firms can avoid things such as, payroll taxes, sick pay, vacation time, benefits, and space and equipment costs. It is common knowledge that in the accounting profession, there are many rules and regulations. How is it possible that outsourcing can occur and stay with the standards that are already set up? Next, we focus on Sarbanes-Oxley Act of 2002 and how it impacts the outsourcing of accounting.

The Sarbanes – Oxley Act of 2002 (or SOX) is U.S. federal law that set new or enhanced accounting rules and standards for public accounting firms and other types of businesses. The impact of SOX and outsourcing are discussed in Paul Cervantes article “Sarbanes-Oxley and the Outsourcing of Accounting”. The implementation of SOX first made firms hesitate on what they would outsource and what they would keep. Because SOX made company profits go down and capital increase, outsourcing accounting related functions are a good way companies could reduce costs. Accounting firms are examples of firms that look to outsource. Deloitte is an example of an accounting firm that has begun outsourcing. Deloitte partnered with Mastek to encourage companies to outsource business practices, particularly to India. Outsourcing allows Deloitte to work with finance professionals with an established safe service, and also it also decreases work turnaround by 40%. Even though outsourcing seems like an easy solution to the implication of SOX there are some obstacles, particularly in Sections 302 and 404. Section 302 states that company and managing executives are responsible for material weakness in internal controls of the company. Section 302 also states that these executives must report fraud to shareholders. Section 404 requires that management assess the internal controls of the company in every quarterly or yearly report. These sections make if difficult for companies to outsource accounting related services because even though these services are outsourced, they are considered to be an extended portion of the company. That means that the company would to ultimately liable, not the service provider. Even with the implementation of SOX, this does not stop accounting firms outsourcing other services.

KPMG is one of the four biggest four accounting firms in the world, and they have started to use outsourcing. According to Sarah Johnson’s article, “What KPMG’s Lastest Purchase Means” KPMG had purchased EquaTerra. EquaTerra is an outsourcing advisory firm. EquaTerra job is to help corporate customers with an outsourcing strategy. This means that they help them connect with customers and complete the agreements. The advisory firm will own the terms and conditions and the intellectual property. Now, KPMG will be able to close outsourcing deals and agreements, without and outside advisor. Overall, this merge will provide clients with a full life cycle of capabilities.

As we can see, outsourcing is a business practice of the future. Not only does it cut costs, but it also increases productivity. Even with the implementation of SOX, companies and firms are still taking advantage of outsourcing opportunities. What we have to look forward to in the future is how much firms and companies are willing to outsource and what kind of new legal obligations might be enforced on them. This will continue to be a very current issue in the future.