Thread a donut, not a needle

January 11th, 2011

Even if you have shaky hands, poor eyesight or a really thick line, threading a donut is pretty easy; you have plenty of room for error. Threading a needle, on the other hand, leaves very little room for error and often requires several attempts to achieve success. When using mortgage calculators to plan your new home purchase, make sure you leave enough room for errors, guideline changes and market conditions.

Closing costs

A closing costs calculator can help you determine how much money you will need for the down payment and closing costs for your purchase mortgage transaction. The down payment savings calculator is helpful in showing you how much money you need to save per month to reach the amount of funds you will need for closing.

The costs you enter and how much you can realistically save per month will determine if you are threading a donut or a needle.

Thread the donut

When using the closing costs calculator, do not enter the lowest possible costs for services, assume slightly higher costs to allow for some additional costs that may occur in your transaction. As a rule of thumb add 10 percent to the costs estimated to ensure you have enough saved--thread the donut.

When using the down payment savings calculator to determine how long it will take you to accumulate the amount of money needed for your closing be conservative in your monthly savings estimates. What if you have an emergency medical condition or your car gets damaged, will you still be able to save the same amount? If you can save more every month that is terrific, but to start off with your best-case scenario may have you trying to thread the needle.

Affordability: don't push it

If you are using an affordability calculator to determine a mortgage amount you feel comfortable paying, or a prequalification calculator to determine your purchasing power, again be conservative with your numbers. Rates and guidelines change. Using best-case mortgage rates or monthly income and debt amounts could leave you disappointed when you finally find the right home to buy.

Mortgage rates have climbed considerably since early November; in an up-rate market it is advisable to pad prequalification mortgage rates by 0.125 to 0.25 percent. If you are just qualifying at the current rate for a $230,000 mortgage, what happens if by the time you find a home, make an offer, have the offer accepted and begin your mortgage application if the mortgage rates have gone up? You may no longer qualify for that mortgage amount and purchase price.


When considering your income, if you are using expected income from overtime or bonuses compare these amounts to what you have received in the previous two years. Underwriting guidelines call for a two-year average for bonus and overtime income, unless the income has declined from one year to the next.

If your overtime income in 2010 was lower than it was in 2009 then not the average but rather the lower amount received in 2010 will be used. There is a good chance your employer will need to complete a VOE, verification of employment, and indicate that there is a likelihood that overtime will continue.


In compiling your monthly credit obligations be sure to count them all. You may be planning on paying a debt off by the time you submit your mortgage application, but as with the savings scenario what if some unexpected expense occurs that prevents it from being paid off?

Mortgage calculators are great tools for helping you plan your new home loan and purchase. They can provide you with useful estimates for costs and payments. These numbers however are based upon information you input based upon information you know today. If there is a chance that any change in any of the information input may result in your not qualifying for your new home loan then you have been trying to thread the needle.

Make your situation easier and your new home purchase experience a lot more pleasant by threading the donut; avoid relying on best-case scenarios when using mortgage calculators.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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