You need to understand the terms associated with assets, liabilities, income and expenses for an effective analysis of your financial situation, which is a necessary step of the mortgage process. The following are some of the mortgage jargons that you come across while going through the process of financial analysis.
What is the process of financial analysis?
Assets and Liabilities
If you possess things of value known as assets, you may be able to qualify for a loan easily. Sometimes, a liquid asset can be of more help as it can quickly be sold and converted into cash. When you sell a thing of value for hard cash, then you actually liquidate an asset.
Do remember not all assets are so easily liquefiable. This is why you need to have cash reserves in addition to capital reserves to easily qualify for a mortgage loan. A cash asset (the extra money you have with you or in a bank account) is, thus, the best you can have for mortgage approval.
All long-term and short-term debts are liabilities, which also include many other financial obligations. Examples include mortgages, student loans and auto loans.
All assets and liabilities are displayed in a balance sheet, which is used to compare the two and calculate the net worth of a company or an individual. The net worth is defined as the difference between assets and liabilities when the former is more than the latter and can be calculated by deducting all liabilities from all assets of an individual or a company.
Access to cash reserves can be important to qualify for a mortgage
Income and Expenses
Your annual income refers to the money you earn in a year. Divide the annual income by 12 to calculate the monthly income. One important thing to understand is the difference between gross income and net income. While the former is inclusive of taxes and other deductions, the latter is what you left with after taxes and deductions.
The sources of income may include rental property, alimony and retirement benefits besides the salary. Depending on the lender, you may be allowed to add other incomes and benefits also to your annual salary, which you may be able to receive electronically in your account through an automatic transfer of funds, such as with direct deposit.
Expenses are what you spend annually or monthly. You may have payments that do not vary from month to month, such as the housing rent (or rental payment) and insurance premium. These are called fixed expenses. The costs of food, gasoline and medicine, for example, may vary from month to month. Such payments are classified under variable expenses.
You may be able to save in taxes, usually on the amount you pay as mortgage interest. You should check with a tax advisor to know if you qualify for any tax savings. The amount you owe in income taxes are expressed as percentages of your income and are known as tax rates. A budget refers to a detailed record of incomes and expenses during a specific period of time.
How to calculate expense-to-income ratio?
Updated on: March 28th, 2015 by Marlon Brown