Insufficient Income to Qualify

The ratio is the Thing. As we learned in Module 1, the amount you can borrow is determined by the amount of your monthly mortgage payment and other debt as a percentage of your gross monthly income. Lenders call this your ratio. If your debt-to-income ratio greatly exceeds 36%, it can be a factor in your loan approval. Don�t let a high debt ratio interfere with your plans. Here are some solutions.

Restructure Your Loan

If you�ve got the cash, you can pay additional loan discount points to drive down the interest rate. This is called a "buydown." The lender will recalculate your debt ratio based on the lower monthly payment and everyone comes away happy. Or better yet, negotiate with the seller to fund your buydown. Yet another option is for the lender to fund your buydown. Making a larger down payment has the same effect. The more money you put down, the less money you need to borrow which reduces your loan amount and debt-to-income ratio. If you put 20% down or more, that eliminates the need for private mortgage insurance (PMI) which further lowers your monthly payment and debt ratio.

Argue Your Case

Remember, obtaining a loan is just as much a negotiation as buying a home, if the lender is willing to talk. Let�s say your monthly housing expenses in rent already exceed 28% of your monthly income, but you�re still managing it. If you have immaculate credit, decent savings, and don�t blow your money on luxury vacations, you�re a reasonable credit risk for the lender. Or perhaps you�re anticipating more income from a job promotion, or just graduated from law school or medical school with a 4.0 grade average�you can argue you�ll soon be gainfully employed.

Count It All and Write It Up

Don�t leave anything out. If you received money from anyone, include it. This means commission income, overtime, part-time income, seasonal income, child support or adult family members who contribute to household expenses. If these sources were consistent over the last two years, your chances are even better. If you�re self-employed, don�t let the lender make a cursory glance at your last two years� tax returns, without mentioning the new contract you just landed. Or show three years of returns if your income was higher three years ago, or provide earnings in the current year.

Liquidate and Restructure

If you have consumer loans, credit cards or student loans, pay them off. That could reduce your overall debt burden enough to lower your ratio to an acceptable level. This may require some prior planning, which is always wise. Another alternative is debt consolidation, moving the high-interest loans into a more reasonable loan with easier monthly payments.

TERMS TO KNOW

Buydown

When the home builder (or seller) subsidizes the mortgage by lowering the interest rate during the first few years of a loan. Payments will increase when the subsidy expires. This process allows a buyer to qualify for a larger loan with the expectation of future income increases to enable the borrower to afford the increased payments.

Down payment

Money paid to make up the difference between the purchase price and the mortgage amount.

Fannie Mae (FNMA)

A New York Stock Exchange Company providing the nation's largest source of financing for home mortgages. It operates pursuant to a federal charter and is and the largest non-bank financial services company in the world. (Federal National mortgage Association)

Fannie Mae's Community Home Buyer's Program

A plan under which Mortgage insurers and Fannie Mae offer flexible underwriting guidelines to increase a low or moderate income family's buying power by decreasing the total amount of cash needed to purchase a home.

Federal Housing Administration (FHA)

An agency of the U.S. Department of Housing and Urban Development (HUD) which insures residential mortgage loans made by private lenders. While the FHA sets standards for construction and underwriting, it does not lend money or plan or construct housing.

PMI

Abbreviation for private mortgage insurance, which protects the lender in case of default by the borrower. PMI is often used when buyers obtain financing with less than a 20% down payment.

Qualifying Ratios

Housing and debt ratios used by lenders to determine a potential borrower's credit-worthiness. The ratios are expressed as numbers like 28/36 where 28 would be the housing ratio and 36 would be the debt ratio. The housing ratio of 28 means that housing expenses should not exceed 28 percent of gross monthly income and the debt ratio of 36 means that housing expenses plus long term debt should not exceed 36 percent of gross monthly income.

VA Mortgage

A long-term, low- or no-down payment loan guaranteed by the Department of Veterans Affairs (VA). Restricted to individuals qualified by military service or other entitlements.

Think & Do Reminders

Places to Look for Help When Applying

Make an itemized list of the ways you can handle hurdles in the application process.

Help with Down payment:

Fannie Mae

Fannie Mae offers a variety of plans that help first-time buyers get into a mortgage with a low down payment.

Veterans Affairs

If you are a veteran or active duty military person, you can get help from the VA for a no-down payment loan.

Non-profits

There are a number of non-profit organizations that offer low interest rate, low down payment loans. Some non-profits even gift the down payment to you.

Your Boss

Some employers offer a down payment as an employment benefit.

POP QUIZ - Pros & Cons of Pre-Approval

Question:

List 3 ways to increase your chances of getting a loan.

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