To develop depth your goal is to earn more income from each of your
current sources. You can develop expertise or get training for your job
or profession that entitles you to better pay.
Increase the depth of your passive income by finding higher interest
paying investments or raising the rent on your rental properties. Move
your mutual funds or non-dividend paying stocks to those that pay
dividends.
Increase the breadth of your income
For breadth, seek out multiple streams of income to increase the
number of sources of repayment. You can develop enough expertise in a
field to become a highly paid employee or consultant, or use that
expertise to write a book, create an information product or conduct
seminars.
Develop and diversify new classes of income producing assets. Consider
dividend paying stocks, bonds or real estate.
For a business loan, lenders determine capacity by looking not only to
the business’s financial projections but also to your personal ability to
repay the loan if the business does not work out as planned. They will
want to know if you have other income (investments, a working spouse,
royalties, pensions, etc.) to help you repay the loan if necessary.
Lenders will want to know the answers to questions such as: if the
business fails, will you be able to return to your present or previous job?
Do you have other skills that could produce income? Be prepared to
provide solid answers to these questions and be able to offer real
evidence to support your answers.
To improve business capacity, increase the products and services that
your business provides. Look for turnkey systems that build off of what
your business already does. If you are a construction company,
consider hiring a certified home inspector in the business. If you own
rental real estate, install a coin operated laundry or vending machine.
With a retail shop, consider candy vending just inside the door, or a
mechanical ride by the entrance.
Saturday, September 16, 2006
Credit Millionaire Ratios -17
Credit millionaires have one more ratio. In fact, this ratio is needed,
because most millionaires wouldn’t be able to pass the other two.
This ratio is reserved for individuals with significant investments or
businesses. Even small businesses get the benefit of using the credit
millionaire ratio—the Debt Coverage ratio.
The Debt Coverage Ratio is your total income from all sources minus
operating expenses. The difference with the ratio for the credit
millionaires and the consumer ratios is the consumer ratios first look to
the borrower’s income for repayment then to the secondary sources.
The credit millionaire ratio considers the net operating from your assets
as the primary method of payment for the debt on those assets. This
ratio puts the borrower’s earned income secondary to the income from
the assets. With the debt coverage ratio, the value of the income from
those assets is generally not reduced, as is rental property income for
an individual borrower.
A Debt Coverage Ratio of 1.0 represents break even cash flow, when the
net operating income from an investment or business is equal to the
debt coverage. The higher the number over 1.0, the better the ratio is.
A debt coverage ratio of 2.0 suggests that the monthly income from the
property is twice the payment on the debt. Lower than 1.0 means that
the income from the property isn’t enough to support the monthly loan
payments.
There are many documents which can be used to show your capacity.
Some are:
Income, W2s or 1099s, check stubs Tax Returns
Court orders for garnishment or support Rent rolls or leases
Royalty agreements Work history
Promissory notes with proof of payments
You can increase your capacity by widening the gap between your
income and expenses. You do this by both increasing your income and
reducing your expenses. Reducing your expenses is not as easy, but
well worth the efforts. We have all heard the axiom, “a penny saved is a
penny earned.” But a penny saved is really MORE than a penny
earned.
Consider this: every dollar that you want to spend, you must first earn.
When you earn income, whether through your job, business, or
investments, you must pay income tax on those earnings before you can
spend them for a non-business expense. So in order to spend $1.00,
you need to earn much more than that.
To calculate how much money you need to earn to spend $1.00, you
add your marginal tax rate (we’ll use 28% for this example) with the
15% tax for social security, Medicare, etc, resulting in a total tax of
43%. Which means you get to spend only 57% of what you earn. To get
the amount you need to spend $1.00, divide it by 57%. You see that an
individual in the 28% tax bracket needs to earn $1.75 to have $1.00 to
spend.
Thus it’s always better to decrease your expenses
than increase your income by the same amount.
What you really want to do is both.
Generally easier than decreasing your expenses is
increasing your capacity by increasing the depth
and breadth of your income.
because most millionaires wouldn’t be able to pass the other two.
This ratio is reserved for individuals with significant investments or
businesses. Even small businesses get the benefit of using the credit
millionaire ratio—the Debt Coverage ratio.
The Debt Coverage Ratio is your total income from all sources minus
operating expenses. The difference with the ratio for the credit
millionaires and the consumer ratios is the consumer ratios first look to
the borrower’s income for repayment then to the secondary sources.
The credit millionaire ratio considers the net operating from your assets
as the primary method of payment for the debt on those assets. This
ratio puts the borrower’s earned income secondary to the income from
the assets. With the debt coverage ratio, the value of the income from
those assets is generally not reduced, as is rental property income for
an individual borrower.
A Debt Coverage Ratio of 1.0 represents break even cash flow, when the
net operating income from an investment or business is equal to the
debt coverage. The higher the number over 1.0, the better the ratio is.
A debt coverage ratio of 2.0 suggests that the monthly income from the
property is twice the payment on the debt. Lower than 1.0 means that
the income from the property isn’t enough to support the monthly loan
payments.
There are many documents which can be used to show your capacity.
Some are:
Income, W2s or 1099s, check stubs Tax Returns
Court orders for garnishment or support Rent rolls or leases
Royalty agreements Work history
Promissory notes with proof of payments
You can increase your capacity by widening the gap between your
income and expenses. You do this by both increasing your income and
reducing your expenses. Reducing your expenses is not as easy, but
well worth the efforts. We have all heard the axiom, “a penny saved is a
penny earned.” But a penny saved is really MORE than a penny
earned.
Consider this: every dollar that you want to spend, you must first earn.
When you earn income, whether through your job, business, or
investments, you must pay income tax on those earnings before you can
spend them for a non-business expense. So in order to spend $1.00,
you need to earn much more than that.
To calculate how much money you need to earn to spend $1.00, you
add your marginal tax rate (we’ll use 28% for this example) with the
15% tax for social security, Medicare, etc, resulting in a total tax of
43%. Which means you get to spend only 57% of what you earn. To get
the amount you need to spend $1.00, divide it by 57%. You see that an
individual in the 28% tax bracket needs to earn $1.75 to have $1.00 to
spend.
Thus it’s always better to decrease your expenses
than increase your income by the same amount.
What you really want to do is both.
Generally easier than decreasing your expenses is
increasing your capacity by increasing the depth
and breadth of your income.
Consumer Credit Ratios -16
Lenders can’t tell how much you earn from your credit report, they rely
on the earnings figures that you report to them. Looking at your credit
report tells lenders only what you owe and how much your monthly
payments are on the accounts that are reported. They compare your
earnings with those monthly payments to come up with the debt-to-
income ratio. Most lenders want to see that your total monthly
obligations don’t exceed 50% of your pre-tax income.
The second standard ratio is the housing expense ratio. This one is
specifically used when purchasing a home loan. The lender will first
look to see that your debt-to-income ratio doesn’t exceed their limits,
then will caluclate your housing expense ratio. This is the comparision
of your monthly mortgage payment for the proposed mortgage compared
with your pre-tax income. The standard is that your mortgage payment
should not exceed 30% of your total income.
on the earnings figures that you report to them. Looking at your credit
report tells lenders only what you owe and how much your monthly
payments are on the accounts that are reported. They compare your
earnings with those monthly payments to come up with the debt-to-
income ratio. Most lenders want to see that your total monthly
obligations don’t exceed 50% of your pre-tax income.
The second standard ratio is the housing expense ratio. This one is
specifically used when purchasing a home loan. The lender will first
look to see that your debt-to-income ratio doesn’t exceed their limits,
then will caluclate your housing expense ratio. This is the comparision
of your monthly mortgage payment for the proposed mortgage compared
with your pre-tax income. The standard is that your mortgage payment
should not exceed 30% of your total income.
When Your Out Of Pocket Exceeds Your Income-Downfall Starts-15
Capacity is simply your ability to comfortably repay the loan. It can be
shown in this role-play:
Paulie: Donna, may I borrow $20?
Donna: How quickly can you easily repay it?
Capacity is reflective of your income. Your loan officer will scrutinize
your ability to repay a loan by looking at your employment and salary.
They want to see a long and stable employment history. Stability also
includes whether your occupation is riddled with industry-wide or
seasonal lay-offs.
Since capacity is that it is your ability to comfortably repay your debt
obligations, lenders will compare your total expenses with your income.
If your present debt expense is too great a percentage of your monthly
income, you may be denied credit because you don’t ratio.
Owen returned the phone to the cradle. “Fran, we didn’t
get the loan.”
After a long pause Fran asked why. Owen explained that
their current debt payments were too high. Even though
the refinance would allow them to pay some of the bills, and ultimately
they would have lower monthly payments and be paying a lower interest
rate, the mortgage company said the numbers still didn’t work.
“I may be able to pick up a few more hours a week at the store”, she
offered.
“No, we’ll just apply for another credit card. There should be a pre-
approved card application in the mail in a few days. We seem to be
getting them every week or so. In the meantime, we’ll have to cut back
a little around here. I don’t understand why the numbers didn’t work.
The company said something about our monthly payments being too
high compared to our income...”
There are a couple of key ratios that lenders look to when making a
credit decision. The first is the Debt-to-Income ratio. This ratio
considers your overall monthly debt payment and compares it with your
monthly income.
shown in this role-play:
Paulie: Donna, may I borrow $20?
Donna: How quickly can you easily repay it?
Capacity is reflective of your income. Your loan officer will scrutinize
your ability to repay a loan by looking at your employment and salary.
They want to see a long and stable employment history. Stability also
includes whether your occupation is riddled with industry-wide or
seasonal lay-offs.
Since capacity is that it is your ability to comfortably repay your debt
obligations, lenders will compare your total expenses with your income.
If your present debt expense is too great a percentage of your monthly
income, you may be denied credit because you don’t ratio.
Owen returned the phone to the cradle. “Fran, we didn’t
get the loan.”
After a long pause Fran asked why. Owen explained that
their current debt payments were too high. Even though
the refinance would allow them to pay some of the bills, and ultimately
they would have lower monthly payments and be paying a lower interest
rate, the mortgage company said the numbers still didn’t work.
“I may be able to pick up a few more hours a week at the store”, she
offered.
“No, we’ll just apply for another credit card. There should be a pre-
approved card application in the mail in a few days. We seem to be
getting them every week or so. In the meantime, we’ll have to cut back
a little around here. I don’t understand why the numbers didn’t work.
The company said something about our monthly payments being too
high compared to our income...”
There are a couple of key ratios that lenders look to when making a
credit decision. The first is the Debt-to-Income ratio. This ratio
considers your overall monthly debt payment and compares it with your
monthly income.
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