Ask The Loan Officer: Don't Be Mortgage Poor!

By
Real Estate Services with Auto & Home & Life Insurance throughout North Carolina

Ironically, today was the first time I had the pleasure of speaking with Lenn Harley.   Being the end of the month, it was a hectic day and I really wasn't sure if I could meet the contest deadline.  So, I scrambled to get my entry in last minute.  I hope this will give prospective buyers, wherever they are located, a bit of insight they may not have already had.

I'll get to what I feel is one of the more attractive options I can offer folks from my end.  I would also advise that folks talk to a reputable FHA Approved Lender to see if that might be the better option.

From my end, let's assume the following hypothetical scenario ... based largely on Lenn's illustration in her post.

  • Sales Price of $605,000
  • 10% Down Payment ($60,500) Loan Amount of $554,500.
  • Like Joe Adams before me, I'd opt for Lender Paid Mortgage Insurance as a viable option (as we are borrowing more than 80% of the Sales Price).  This Mortgage Insurance is built into the Interest Rate and translates into a higher rate.
  • As of the end of the business day today, my Interest Rate on that product was also 6.875%.  That translates into a principle & interest payment of $3644.52.  Assuming taxes work out to be about $500.00 a month and Homeowner's Insurance is at $100.00 a month, the total monthly payment would be about $4244.52.

Lenn said the average income in that area was about $123,000 a year.  That's $10,000 and change a month coming in as income.  Bear in mind, this is Gross Income ... before Uncle Sam gets his take. 

I want to talk real fast about Debt Ratios.  Hopefully, in terms everyone can understand.  Lenders calculate both your front end and back end debt ratio.  Your front end debt ratio is simply the total mortgage payment (including taxes and insurance) versus the Gross Income coming in the door each month.  In this example, the monthly payment would be $4244.52 vs. a Gross Income of $10,000 a month.  We are over the 40% ratio ... just on the front end!  Yikes!!  The back end debt ratio takes into account your total mortgage payment and all other monthly debt (showing on credit, including things such as child support) but doesn't take into account such things as Utility Bills, Groceries, the beloved cost of Gas, etc.  A car payment here, a student loan there, and all of a sudden we are dangerously close to being at 50% on the back end!

As a general rule, lenders want your back end debt ratio to be under that 50% mark.  There are exceptions to that rule, like lots of money in the bank and/or retirement, a super strong credit file, a very stable job history, low LTV's, and the like.

Consider for a moment that just because the lender works up the numbers on paper and qualifies you, doesn't mean that's going to be a comfortable payment at the end of the day.  There is a term called Mortgage Poor where you are struggling month to month just to pay the mortgage and all your other bills ... with little, if anything, left over.  That's not a good place to be ... part of any competent & ethical Loan Officer's job is to look out for your best interests now and down the road, advising accordingly.

In this hypothetical scenario, there are a few other product options I'd sit down with the client to consider.  They include but aren't necessarily limited to the following:

  • Interest Only Loan
  • 40 Year Mortgage
  • 1st Mortgage & 2nd Mortgage Split, avoiding PMI altogether.

The numbers in this hypothetical are tight and the level of comfort with the payment options for the borrower should be looked and considered very carefully.  At the end of the day, your mortgage payment affords you a roof over your head.  At the end of the day, you fall asleep at night.  You shouldn't be worrying about that very payment or roof.

I'd like to see more down payment in this scenario, if at all possible.  Options could get them in the door but I'd be leery of it hitting them on the posterior after it shuts.  It's doable, but I'd tread cautiously in helping them out.

Speaking with Lenn today, she mentioned that the inventory in her area is massive.  It would also be advisable to take a long gander at that inventory as a buyer ... perhaps there's something even more affordable on the horizon.

 

Jason Sardi

Mortgage Consultant

First Choice Equity Group Inc.

610-439-2166 ext. 229

jsardi@fcegi.com

 

 

Licensed with the Pennsylvania Department of Banking.

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the man to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Groups:
Mortgages
New Jersey & Pennsylvania -- Realtors/Loan Officers/Title Clerks/Real Estate Lawyers
Delaware County, PA
Posts to Localism
ASK THE LOAN OFFICER
Tags:
ask the loan officer
lenn harley
pennsylvania mortgages
allentown mortgages
loans in pennsylvania

Comments 34 New Comment

Anonymous
Post a Comment
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the umbrella to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Ambassador
500,646
Jason Sardi
Your Agent for Life
Auto & Home & Life Insurance throughout North Carolina

Robert - Thanks and good observation.  I believe to do this job the right way, we have to take a consultative approach.  I hope and believe I do that to the best of my ability.    You make a heck of a point regarding emergency funds.  That's crucial in a world where you never know what may happen next.

Fred - Agreed, I'm starting to like your line of thinking:-)

July 03, 2008 02:11 PM
Ambassador
380,745
Tracy Santrock
Raleigh - Cary Realtor
Fonville Morisey/Santrock Realty Group, Inc.

As always, thanks for all of the tips.  Glad you're using the network within Activerain. It works!

July 03, 2008 04:16 PM
Ambassador
221,943
Eleanor Thorne
Cary Mortgage Loans 919-649-5057
Steve Thorne NC Mortgage Experts

Jason - Like Janet - Been out of town.  Congrats on a difficult scenario!  As you and Jeff mentioned - it's a stretch deal.  I think it speaks to Lenn's overall question in her original post... can the Average "worker" making the "Average Salary" in Fairfax buy the "Average House?"  And the answer is maybe.

July 07, 2008 09:29 AM
Rainer
38,759
Michelle Chamberlain
Suburban Philadelphia Mortgage Broker
Above All Financial Services -Pennsylvania Mortgage Broker

So Jason are you going to tell me that if this hypothetical situation were real and you advised the client that you didn't think this was a good move for them seeing as though they'd end up "mortgage poor" you would actually not do the loan?  Suppose the couple already fell in love with the home so and couldn't be talked to one that was more in their price range and reject all of your other options:

1) They don't want an interest only because they heard in the news they were bad and they want to build equity.

2) 1st and 2nd mortgage split would avoid PMI but probably not change the payment much as the second would carry a much higher rate.

3) They don't want a 40 yr loan because of their age and they want the house paid off before retirement.

What do you do?

 

July 09, 2008 12:01 AM
Ambassador
500,646
Jason Sardi
Your Agent for Life
Auto & Home & Life Insurance throughout North Carolina

Tracy - You are right there, have a great week!

Eleanor - Bingo, I thought you did an excellent job with your entry as well.

Above All Financial Services - Well, the three options you pointed out weren't the one I laid out as the product I'd use, though I did make a point that those are other options we might explore.  As far whether I'd do the loan for them, good question.  I was always taught that if you had a loan approval for a product and the client wanted it (even if you advised it's not in their best interest) you'd have to make them the loan.  With news laws & regulations, I'm not sure how that would be interpreted these days ... but I would advise according and if they are approved for the loan product, I feel I'd have to honor that approval.

July 09, 2008 08:38 AM
Anonymous
Post a Comment
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the camera to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Ambassador
500,646

Jason Sardi

Your Agent for Life
Ask me a question
*
*
*
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the printer to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase: