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.
First Choice Equity Group Inc.
610-439-2166 ext. 229
Licensed with the Pennsylvania Department of Banking.