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

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Services for Real Estate Pros 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.

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Rainer
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Josh Phillips
ABI Mortgage - East Dundee, IL

Jason,

good job unfortinetly this sounds like this faux barrower is just another person buying a house that they realisticly can't afford.  (BK in the making?) Also Lenn makes the coment that this is still in fha range? On this loan amount @ 6.5% no lender would give that loan amount at that rate right now not even close especialy at that ltv.  Sounds like this guy needs to find a different house.

Jul 01, 2008 10:59 AM #15
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Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Jason....   well done on some of the explanations.... but here is a huge pet peeve of mine, when people write a posy giving rate and example. Two things missing....   APR... if not, the costs need to be spelled out.  There is no true comparison to what you mentioned in your rate from yesterday.

 

Secondly....  you give an example with holes in it.  Not trying to sound rude, just direct.  Even though Lenn might have given this in her post, you didn't link to her post or mention it here.  FICO scores...  your rate and scenario are based on ratios and giving a rate.  But as a loan officer, I am not sure if the rate is good or bad.

Lastly... you mention high ratios....  can you do this on a Jumbo loan?  Talk about an Approved/Elligible?  In my honest opinion, rate is irrelevant if it's not approved in the system. Sure, you bypass MI, which is very hard on ratios and approaving loans.  But knowing fico score and your total charges gives me a better explanation of what you are charging. 

Overall, your best point that has been mentioned, ypu said....... "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."

On another note.... thanks for the polite mention....

jeff belonger

Jul 01, 2008 11:55 AM #16
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Jeff - First off, click on Lenn's name in the very first sentence of this post.  It links directly to her post.

I didn't dive into APR and my costs because, quite frankly, I thought the nature of this post and contest was about whether or not the home was affordable to the borrower.  So, I concentrated on total payment and debt ratios to illustrate that point.  To get into APR, costs, & such would have gotten off that point ... which was to decipher on whether the borrower could afford.

As far as the loan being approved and talking about a hypothetical credit score, again, I wanted to keep this site and to the point.  With this hypothetical, I was assuming the credit score was high and credit worthiness was there.  I was also assuming they were approved in the system.  I wanted to concentrate on affordability, which I thought was the backbone of the contest.  Perhaps I should of attached a hypothetical GFE and TIL ... however I don't know how to do that on posts and didn't want to overcomplicate the matter.  I hope this addresses those concerns ....

As far as the mention, anytime!  I see you caught that link:-)

Josh - Those were kind of my thoughts.  I think this is very doable ... I just don't know if it is the best decision to be done with the hypothetical sales price and down payment.

Joe - Well put.  Those '50' year products are crazy!  I didn't mention it because I never closed one of those.  They are probably pretty popular in states such as California & New York though.

Diane - Thanks.  I hope you were able to take something away (positive & enlightening) from it.

Jennifer - MWA & FWA!

Janet - Thanks!  I heard a vicious rumor that Stated Income Loans will become illegal in the State of Pennsylvania.  I was never a huge fan of them, but they are a legit product for some situations.  Our Government providing more legislation for the Mortgage Biz, that's another post entirely.

Neal -  It's not always possible, especially in really high priced areas but I believe you are right.  Besides, 100% financing and 'little to no money out of pocket' had us a bit too spoiled for safety.

Christy - As I mentioned, I would advise the client to seek advisement from a FHA approved lender.  I'm not sure the ratios would fly, but it worthy of consideration.

Jesse - Thanks man!  Seems to me that being married to your house can be even more expensive if it ends in a divorce, so to speak ...

Katerina - Thanks!  I tried to keep it concise and not too overbearing ... while keeping the bottom line front in center.

Christine - Sure does.  I'd hate to call them a few months down the road to see how they are doing and find out the number is disconnected.

 

Jul 01, 2008 12:31 PM #17
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Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Jason,

Good information. I have always counseled my clients in what makes a comfortable payment. Not long ago it was possible to get an approval for someone with a 60-70-80% debt ratio. I actually got approvals over 100% DTI. The question is always, not if they qualify, but can they really afford it.

Jul 01, 2008 02:00 PM #18
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Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth

Jason, great feature post. I know many in our area got into this mortgage poor situation and inevitably they had to sell the house or it went short sale or they took a huge loss to get out of that burden. Who would want such high debt ratios? This was from an area that had very affordable housing but people bought five bedroom homes with just two people. I thought you raised the awareness very well going in to keep those ratios as low as possible to do other things in your life with your money besides paying it all on a house loan.

Jul 01, 2008 02:26 PM #19
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
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Jennifer- You are too good to me sweetie!  Thank you so much.  Years ago, I really wanted to ingest more humanity into the financing side of things ... sometimes, for better or worse.  MWA!!!

Ray- FHA is definitely being billed as the soup du jour.  It's a great product for some people.  Good to see you around again.

Debe - I wonder that same thing all the freaking time.

Fred - Your last sentence speaks volumes.  Approvals at 70%, 80%, or 100%?  Yikes, that's scary!

Gary- The long term affects can be disastrous.  Part of our job when counseling and working for folks is to look out for their best interests down the road.  I'm pretty darn sure you do just that.

Jul 01, 2008 03:55 PM #20
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Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Jason,

I actually closed one loan with a 124% back end ratio. Of course, he was moving, recent phd graduate, didn't have a new job yet and had enough cash to pay for the house 3 times over and had a near 800 credit score. Still, automated no longer does those stupid things.

Jul 01, 2008 04:00 PM #21
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
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Fred - They say you learn something new every day, especially in this business.  I would never of thought .... WOW!

Jul 01, 2008 04:09 PM #22
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Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

The way automated used to work, I would always run it conforming first before I did a stated income or a no doc. Same customer but sometimes the automated worked. I know it was strange, but I saved a lot of stated/no doc customers money.

Jul 01, 2008 04:12 PM #23
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Neal Bloom
Keller Williams Properties, Weston FL - Weston, FL
Realtor CRS-Weston FL Real Estate

Jason,

i agree there has to be a real program out there for people who want to buy a home and have little money down but I think by having strict guidelines will keep out the ones who were abusing it. This way people can keep their homes instead of losing them later.

Jul 01, 2008 04:30 PM #24
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
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Fred - I hear you there.  Strange business, isn't it?

Neal - With those thoughts, I agree.  I'm a firm believer in any "No or little money down" transaction ... reserves are a must.

Jul 02, 2008 11:02 AM #25
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Josh Phillips
ABI Mortgage - East Dundee, IL

"I thought the nature of this post and contest was about whether or not the home was affordable to the borrower" Jason you are a great blogger cause I would have lost with my one word blog

 

NO!

lol keep up the good work!

Jul 02, 2008 01:20 PM #26
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
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You may have just won the contest Josh:-)

Jul 02, 2008 01:31 PM #27
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Robert Smith
Byron Bank - Grand Rapids, MI

Great post Jason.  You obviously take a consultative (not transactional) approach with your clients.  Neal, your comment is true....sort of.    Generally, people that have saved up substantial down payments are inherently fiscally responsible and thus are much less likely to default on their mortgage.  However, simply putting more money down doesnt always translate to a safer, more secure position for the buyer.

Lets say a  young couple has $10,000 liquid cash, and say $4,000 in total retirement savings.  They are buying a home for $10,000.  Should they put 10% down, or go FHA with 3% down?  Its true that by putting 10% down they will have a lower payment. but probably only by $42-$50 per month or so.  Has their risk of foreclosure gone up because their payments are $50 more per month?  No, not really.  Plus, but putting less down, they now have $7,000 that can be set aside in an emergency fund (or invested if they already have that fund set up). 

Putitng down the highest possible down payment is often NOT advisable.  It depends on each client and their specific situation.

Jul 02, 2008 06:01 PM #28
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Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

That is why every loan application is different. That is what is wrong with internet mortgage companies. They want to get every square peg into their round hold. Personal contact with people is the right way to do this business.

Jul 02, 2008 06:27 PM #29
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
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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:-)

Jul 03, 2008 02:11 PM #30
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Tracy Santrock
Fonville Morisey/Santrock Realty Group, Inc. - Cary, NC
Raleigh - Cary Realtor

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

Jul 03, 2008 04:16 PM #31
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Eleanor Thorne
Steve Thorne NC Mortgage Experts - Cary, NC
Cary Mortgage Loans 919-649-5057

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.

Jul 07, 2008 09:29 AM #32
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Michelle Chamberlain
Above All Financial Services -Pennsylvania Mortgage Broker - Secane, PA
Suburban Philadelphia 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?

 

Jul 09, 2008 12:01 AM #33
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
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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.

Jul 09, 2008 08:38 AM #34
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