Understanding Credit
Section 6 - Budget Letter
Another way to determine the affect of payment shock is through the use of a budget letter. A budget letter is
actually a worksheet that identifies the ongoing monthly expenses and determines how much excess cash if any
will be available. The best approach to a budget is to identify all the current monthly bills including gas for
the cars and food. Then factor in utility bills that may not be part of the monthly expenses due to how the
rent is structured and add in a monthly maintenance amount. Once the expenses are all identified subtract them
from the monthly take home pay. The answer to the equation will then yield the amount that will be available
for a house payment. Once a monthly house payment is identified then you can compute the amount of a mortgage
that yields that type of monthly payment. From there, you can determine the sales price of a house that you
should be looking to buy. Even though all mortgage ratios are based on gross income, we all know there are taxes
to be paid and that it is the take home amount that we have available for living. One thing to keep in mind is
that once you determine you want to buy a house, you can increase the amount of your deductions so your take home
pay is greater. This approach eliminates a big tax return each year but makes it easier to handle your monthly
obligations.
Section 7 - How You Handle Unexpected Financial Events
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