Introduction Banks will often loan you
more than you can really afford
Creating a budget will help you determine how much you can afford to borrow
Maintaining a budget will help you achieve any financial goal
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Budgeting is ImportantWith a Budget No Budget
Reduced Stress
Better Quality of Life
Peace of Mind
Comfort in knowing your finances are properly managed
75% of Americans live paycheck to paycheck
Money is the #1 cause of divorce in America
Less than 10% of high school graduates receive a financial education in school
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What is a budget?More ideas
A financial plan
A list of expenses and income
A financial road map for the future
An action plan
A way to avoid going broke
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Why should you have a budget?
Budgets …
Stop you from overspending Help you get out of debt & save money Give you peace of mind Help you determine what is important to you Help you meet your financial goals Help your family focus on common goals Decrease family conflict
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Tips for Creating a Good Budget
The most important things to remember:
Spend less money than you make. Maintain savings.
Other tips: Detail, detail, detail Make sure your budget tracks all your expenditures Remember, a budget is an action plan Include a contingency category to cover unexpected
expenses
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Track your Spending
One way to do this is to create an envelope for each category in your budget
Put the receipts in the correct envelope at the end of each day
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Spending is About Choices
If you don’t have a budget, your latest whim or emergency will make the choice for you
With a budget, you prioritize spending so that your money is used on what you value
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Lifestyle & Family Decisions
You will need to make some financial choices
Most of us don’t have enough money for everything we want
Remember that what is right for your family may be very different from what is right for other families
A budget allows your spending to be in line with your financial goals
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Other Considerations
Do you have elderly parents you need to consider?
Do you have college-bound children?
Do you or family members have disabilities?
Do you have to pay for …
Tutoring?
Athletics?
Childcare?
After-school programs?
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Expenses that Lenders Don’t Count
When lenders decide how much you can afford to borrow, they don’t include:
Childcare or after-school care
Elderly parents
Tuition expenses
Disabilities
Tutoring
Athletics
Vacations
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Everyone Must Participate in Household Budgeting
Who spends money in your household?
Partner/Spouse
Teenager
Parent
Other household members
Everyone who spends money needs to be part of this process
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Have a Plan
Your budget is your plan forthe future
Now you know how to create a budget and determine an affordable monthly payment
Don’t shop for houses or loans until you have a budget in place and know what you can afford to pay
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How do you qualify for a loan?
The underwriters will look at:
Debt-to-Income Ratios
FICO score & credit history
Adequate collateral for the loan (down payment)
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Debt to Income Ratios
There are two key ratios:
“Front-end” ratio
What portion of your income is used for your mortgage payment?
“Back-end” ratio
What portion of your income is used for all debt payments?
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Calculating “Front-End” Ratio
Front-end example: Total monthly mortgage payment = $1,000
Total monthly gross income = $4,000
$1,000/$4,000= 0.25
Front-end ratio = 25%
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Calculating “Back-End” Ratio
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Back-end Example:
Total monthly loan payments of all kinds (including mortgage) = $1,500
Total monthly gross income = $4,000
$1,500/$4,000 = .375
Back-end ratio = 37.5%
Borrowing
Overall Debt Ratios
According to Example:
Front-end/Back-end
25%/37.5%
These ratios are good ones that should qualify for a loan
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Three reasons for YOU to budget
List three ways a budget would help you.
Be as specific as possible.
1. How a budget can help me #1
2. How a budget can help me #2
3. How a budget can help me #3
4. What challenges prevent you from maintaining a budget?
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Classroom activity
Best Way to Create a Budget
You won’t have a good budget until you really know what you spend your money on.
Keep track of all spending for 30 days
Keep all your receipts for 30 days
Organize your receipts
Separate into different categories
Total your expenditures in each category at the end of the month
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Classroom activity
Homebuyer Education
Teach future homebuyers about the home buying process
Classes offered every other month (odd months)
8 hour HUD-approved course
Collaboration with Las Positas College
Financial Literacy Education
Group classes offered every other month (even months)
Two sessions
Understanding credit
Budgeting
Expanding outreach to emancipated foster youth and other at-risk youth and young adults
One-on-one counseling to prepare for homeownership