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Apparently what needs two six-hour classes on the first two Saturdays of spring can be summed up within a couple paragraphs (at least in a couple installments) on a slightly successful somewhat humor associated blog. I am, of course, referring to the first time home buyer class my lender has required me to attend in order to obtain a state subsidized mortgage. I’m not knocking the program as it is meant for first time home buyers. But the elementary view and information this class provides these hopeful and somewhat naive homebuyers is almost worthless. At first I assumed the audience was somewhat knowledgeable in regards to personal finance. I mean, this is a class for people ready to make the biggest purchase of their lives. However, I was seriously surprised when more than a few hands raised to notify the teacher that they didn’t know what a “Credit Score� was. As I sat in the freezing room filled with plastic folding chairs listening to a real estate professional, a home inspector, and a real estate lawyer try to drum up business for themselves instead of educate home buyers, I decided to put down on paper the important lessons and intricacies that may be useful to a somewhat more educated, or simply alive, first time home buyer that I’ve discovered not only during the home buying process but also through my experience as a former loan officer and what I’ve learned while preparing to sit for the Real Estate Licensing exam in Ohio. Today’s topic – Preparing your financials for a Mortgage Preparing for a loan is, I think, the most important part of the process. Hopefully you’ve made some decisions as far as where you’re going to live and what type of house you’re looking for. A little bit of research around these assumptions will help you determine how much of a loan and down payment you’re going to need. Preparing yourself, or more importantly your finances for a loan, may take months or years depending on how far off plan you are. The two most important things that the bank will look at will be your debt-to-income ratio and your credit score (hopefully you know what that is). Your debt-to-income ratio simply is your month debt payments divided your gross income divided. Now for the most part you want to pay off debt in order of the highest interest rate, by the way, if you’re carrying credit card balances, you’re not even ready to begin thinking about buying a home. Work on a budget to get your credit cards closed and make yourself debit-dependent instead of credit-dependent. When evaluating your debt-to-income your bank will mainly look at monthly required payments and then debt balances, but the two measures that matter most are your debt-to-income ratio using only your new house payment, taxes, insurance, and possibly condo fee, and your total debt-to-income ratio including all monthly debt payments and your new house payment, taxes etc… These two ratios should be under or close to 28% and 36% respectively. Now this is where some creative financing takes place. The two determinates you can effect in these equations are your income, which is not as controllable as most of us like, and your current monthly debt payments. Like I said before, normally it’s prudent to pay off your highest interest loans and debts first, but when trying to improve your debt-to-income ratio by reducing your monthly debt payments this may not be true. Consider two student loans, one at 8% and one at 4%. Most people’s first instinct is to payoff the first loan with the 8% interest because the interest is higher. However let’s also assume that the 8% interest loan is amortized over 5 years with a balance of $5,000, and the 4% loan is amortized over two years with a balance of $5,000. The payment on the 8% loan is $101.38 and the 4% loan is 217.12. The lower interest rate loan has a higher payment due to the amortization time. After you’ve decided how much money you’ll need for down payment, closing costs, reserve funds, etc… any extra funds should be applied to your highest monthly payment to balance ratio. In other words, the 8% loans ratio is 101.38/5000, or 2% while the 4% loan is about 4.3%. This will lower your debt-to-income ratio. This theory should be applied to all your debt balances and monthly payments that have the same tax advantages. Notice how I compared two student loans instead of a student loan and a car loan. Normally the student loan will have tax advantages over the auto loan, because you can deduct the student loan interest you pay. This theory may also have negative effects in the future. Essentially in the scenario above you’re sacrificing a loan with a lower rate to afford a better home. If you had paid off the 8% loan instead, you’d pay less interest over time. These are all things that should be considered on an individual basis and they unfortunately don’t fit easily into a widely flexible calculation. Paying off any debt will also improve your credit score. The calculations that determine your FICO score are very complicated and outside of the scope of this writing. What I can tell you is that if your FICO score isn’t above 700 you can expect to pay a higher interest rate or points on your loan than what the market is advertising. Also, with all the problems with the sub-prime market if you’re FICO score is below 600 you may not have a prayer finding financing. Based only on my experience alone, the most diligent efforts to improve a bad credit score can only rise a score by 50 points a year at best. Based on that and your own knowledge of you credit history you should be better able to determine what your timeframe is before you apply for a mortgage. And like everyone says but almost no one ever does, you should check your credit score at least once a year and with all three major reporting agencies. Maybe the most helpful thing to do when you want to start preparing for a mortgage is to play with the numbers. Using something like Excel, list all of your debt balances, payments, terms, etc.. along with your income. Make some quick formulas to automatically calculate your debt-to-income ratio and then run through a few scenarios. Playing with the numbers will give you a better idea of what you need to do to improve your debt-to-income ratio and provide you with a better timeline of when it'll be proper to apply for a loan.

People love to bemoan the supposed excess of corporate executives, especially in the wake of the major corporate scandals that have been front page news for the last few years. People say that executives are obese pigs feeding from the corporate trough, reincarnations of decadent Roman emperors gorging themselves on rampant profit, big-bellied Nash caricatures come to life, etc. Well, nobody actually says those things in those words, but that is the general sentiment. All things being equal, executive pay is the product of market forces and it is hard to argue with what the market is wiling to bear. Weak compensation committees on boards of directors may indirectly contribute, but that is the concern of the shareholders who elect board members, not John Q. Public. But all things are not equal and executives can and do use guile and omission to enrich themselves in ways that deceive the very shareholders they are supposed to be ultimately working for. Here is one such deceit.

Many corporate executives are paid partially in stock options. This, theoretically, aligns the incentives of the executive with the incentives of the corporation as a whole and its shareholders. The better the company does, the higher its stock price will rise, and the more money the executive can cash in his options for. For example, say Company ABC's stock price is $20 per share. An executive is issued 10,000 stock options priced at $20 per share as part of his annual compensation, optionable in three years time. At the end of those three years, ABC's stock price has risen to $30 per share. If the executive chooses to cash in his options, he effectively pays $20 to receive $30, a $10 profit. In this scenario, the executive makes $100,000 (10,000 options multiplied by the $10 increase over the option price). This is very simple stuff.

Sometimes, the options are issued not with a time constraint, like three years, but with a performance or market constraint. This means the options are not optionable unless some sort of performance or market outcome is reached. (and it also means these aren't strictly options, but they do have the same characteristic of only being worth anything under specific conditions). This ties the executive's pay directly to some specified goal. These are sometimes known as phantom stocks, because they don't really "exist" until the goal is met. If the goal is never met, then the executive never receives the stocks at all and gets nothing for that portion of his compensation.

But, crafty executives and rubber stamp boards of directors have found a way to ruin even this very specific incentivized compensation by creating phantom stocks that pay dividends regardless of whether the executive ever meets his goals. In some cases, phantom stocks paid out over $200,000 in dividends every year, completing defeating the original purpose of using phantom stocks.

Next time you are thinking of investing in a specific company, take the time to check out the company's yearly proxy statement, available for free on the SEC's website. Under new SEC regulations, the disclosure requirements for executive compensation have been expanded and particularized, making it easier for the average person to read and understand the convoluted structure of executive pay and making it harder for deceitful executives to hide the true nature and extent of their compensation packages.