One of the most important concerns you will deal with in the remodeling process is the budget. How much money can you afford to spend on your project? This information will help your remodeler determine if your expectations are realistic. For example, if the whole-house addition of your dreams is going to cost more than $100,000 and you only have $40,000 available, you must seek alternate financing or scale back your plans. You meed that information before you and your remodeler spend a lot of time and money designing a project you cannot afford to build.
If you're planning to borrow from the bank, savings institution, credit union, mortgage banker or finance company, first determine how much money you can obtain. Qualifying for a loan ahead of time saves time and disappointment for everyone.
Most lenders follow the 28 to 36 rule to determine how much money you can borrow. Loan officers prefer to see your monthly housing costs-including principal, interest, taxes and insurance-below 28 percent of your gross monthly income. Total monthly payments for housing and all other consumer debts (such as a credit card payments, car loans, student loans, or alimony) should not exceed 36 percent of your gross monthly income.
SOURCES FOR FINANCING YOUR REMODELING PROJECT
Personal Savings
According to the Federal National Mortgage Association (Fannie Mae), about half of all homeowners use personal savings to finance their remodeling plans. If you are a homeowner just beginning to think about a project, start saving now. Even small regular savings can build up money for a down payment. If you save the $5 or more you spend for lunch every day, in a month you will have more than $100. If you walk rather than take the bus or subway , you could save another $10 or more a week.
Equity-Based Financing
If you purchased your home several years ago and you have some usable equity, consider these three financing options. Home Equity Lines of Credit, Home Equity Loans (second mortgage), or Cash-out Refinancing you Mortgage.
Government-Backed Financing Options
What if have little or no equity in your home or you want to purchase a home in need of substantial remodeling? Several government-backed programs can help you do just that.
Other Financing Options
- Borrow against assets such as the cash value of life insurance; savings; pensions and profit-sharing programs offered by your employer; or your stock and bond accounts at your brokerage.
- More remodelers are offering financing as part of the total service.
- Look into state-sponsored, low-interest programs for qualified homeowners.
- Ask a family member to lend you or give you the money in exchange for a shared-equity arrangement.
- Look for reverse mortgages for homeowners if you meet the age qualification.
- If you have sufficient credit or cash advance line on your credit card, you can consider using it to finance your project.
Regardless of the type of financing you apply for, lenders must have confidence in your ability to repay the loan. They will assess your credit worthiness by examining three primary areas:
- Income
- Debt and other financial obligations
- Credit History
Plan to provide information about your employment, including tax returns or W-2 forms for recent ears and your most recent pay stun. If you are self-employed, you will need to show a year-to-date, profit-and-loss statement; a balance sheet singed by an accountant; and a signed business and personal tax returns from the past two years.
Recent Bank Statements
Monthly bank statements show the flow of funds through your checking and savings accounts. Lenders usually require a list of your bank account numbers, bank addresses, and approximate balances for each of your checking and savings accounts.
Investments
You must provide a description of any stocks, bonds and mutual funds you own, along with the number of shares or face value, the name in which they are registered, and their market value.
Automobiles
List the year, make, and model of all vehicles you own. For the approximate value of these, consult the National Automobile Dealers Association Official Used Car Guide.
Debts and Fixed Expenses
Supply a detailed list of your creditors, including credit cards accounts, car loans, student loans, child-support and alimony all with addresses, account numbers and approximate balance.
Identification
In addition to your Social Security number, you may be asked to show such documentation as a Social Security card, driver's license, last year's W-2 or 1099 form, last year's tax return, or a copy of a computer check stub with your name, Social Security number and employer's name.
Reports from Credit Bureaus
Credit information is managed by a vast network of computers that monitors the daily flow of credit transactions. Expect your lender to order a copy of your credit report from one of the three credit-reporting agencies to verify your personal credit history, income and employment figures.
Consult Your Tax Planner
Have you considered any increase in property taxes, insurance, house maintenance, and utility costs that will occur as a result of your remodeling project? Will the interest on your home improvement loan be tax deductible? The best person to help you determine the tax consequences of your remodeling project is your accountant, tax planner or financial advisor. Ask for tax recommendations early in the planning process so you can determine the wisest course of action.
Consider Resale Value and Cost Versus Value
As a rule of thumb, you should avoid over improving your home. You may really want to build a turreted room with a spiral staircase, but would it be a wiser investment? Which remodeling projects net the greatest return? Consult a real estate agent, appraiser, and/or architect about which improvements will increase your home's resale value, which could help most to sell the house later and which are typical of the neighborhood.
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