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ARDELL's Seattle Area Real Estate Blog

Jan. 14, 2006 - Predatory Lending

Q: Is the 33% an absolute limit? What if I am over that limit? Are there programs that I can still use to qualify? Will I pay a higher interest rate?


Ardell's response:



Sure. You can get a mortgage for 300 times your gross income, if that is what you want to do. That is why this subject is under "Predatory Lending". Predatory Lending is not just about a higher interest rate. Often when people do not know that 28% to 33% of their gross income is "normal" for a housing payment, they do not realize that 50% may be too much to spend on a housing payment.

 

Qualifying ratios are not carved in stone, they are a guideline based on sound principles.

 

My caution is this. If you are getting a mortgage that puts your payment in excess of 33% of your gross income, make sure you know beforehand that you are passing the "norm". If you go over 40% don't be surprised later if you have to live on hot dogs or you have to go to your Mom's for dinner every night.

If you have a family and children, staying toward 28% will allow you and you family to have other things in their life besides a house. Like vacations and soccer camp. If you are single, 33% might be more appropriate and still leave you some money to go on vacations, buy clothes and see a movie once in a while.

Often lenders will go up to 40%, without increasing the rate, if you have no other debt. But chances are you will eventually have a car payment or credit card after you buy your house. So the basis of their allowing 40% (no debt) is likely to change and make it hard to pay those mortgage payments sometime in the future.

There are programs that will go to 50% or more of your gross income on your housing payment, but that will likely throw you into a sub-prime loan. Still OK if say you are an intern and expect to be making a lot more money in the next year or two. Or if you didn't include your Significant Other on the loan, and their income is "household income" which was not considered by the lender. In that case you would likely apply for the loan using "stated" income rather than "documented" income.

It has never been easier to get a loan.
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Jan. 15, 2006 - Qualifying Ratios

Posted by Anonymous
Wow! A real estate agent that suggests not to go to the max the mortgage company says you can! When my husband and I shopped for the first home that either of our families (neither of our parents or any of our siblings owned homes) had ever bought, we were DINKS (dual income no kids). Of course we qualified for twice the house we actually bought. But, OUR goal was to have one of us stay home with future children which meant half the income we qualified with would go away. The agent (He represented the seller, but we didn't know that because no one told us back then!) kept pushing us to buy bigger, more expensive houses. We did not listen to him (He wasn't listening to us either!) and stayed within our budget. At times we regretted our decision when our peers had bigger houses, but today we have a big (for us) Victorian AND an apartment building AND partnerships in other rental properties. Plus, we raised the 3 kids and one of us stayed home to do that AND we didn't eat hot dogs unless we chose to AND we could all go to the movies or participate in ski team, etc.

Edited by Ardell on January 15, 2006 at 10:04 am
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Jan. 15, 2006 - Response to comment

Posted by ARDELL DellaLoggia
First, I thank you for your comment and kudos. As you have pointed out, how much you spend on your home drastically affects your life in other ways. That is why I say that no one should put that decision into someone else's hands! Good for you for "sticking to your guns" and doing what was best for you and yours.

I will write a separate post on Who Represents Whom, in response to your other comments.

Thank you again!!
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Jan. 16, 2006 - FYI

Posted by Anonymous
Hi Ardell..Having spent 35 years in lending (a broker now) I would like to help you on some details of underwriting guidelines. The 28/33 rule had to do with income vs. house payment and income vs. debt+ house payment. This rule has been around for many years BUT the standard today is a lot higher. FHA has traditionally been 33/40 and I think if you check with your lenders you will find that is now the norm. VA is excess $ PFM. They have always had their own way of doing it. Hope this helps. cj@freedominmontana.com.
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Jan. 16, 2006 - Response to CJ's comment

Posted by Anonymous
Thank you for your comments CJ, but you are mixing apples and oranges there. Up until now, we have only been talking about the housing payment (front end) principal, interest, taxes and insurance/condo fee (PITI). We are talking about housing payment, not qualifying ratios including the total monthly debt (back end). There never was a 28/33 in the last 30 years, as you suggest. There was a 28/36 which jumped to a 33/38 and then to a 40/40 for conventional lenders. The 28% of your gross monthly vs. the 33% of your gross monthly up to 40% of your gross monthly that we have been discussing, refers to housing payment (front end) only.

When I am with a client we discuss the total debt issues. Each higher front end leaving you less room for debt. And I know that lenders can and will go higher. That is the point of this discussion. Each individual should understand how the lender is deriving that and make their own decision regarding how much of their gross income they WANT to spend on housing. As to debt, generally that is not something within their control at the time they purchase a house as it is already in place. But they can take control of their lives by participating in the decision with regard to how much of their gross income will be "lost" once they purchase the property.

Too many people are walking out with a letter that says they can afford a house at X purchase price, without knowing how much of their gross income is being used to calculate the monthly that takes them to that purchase price. This is not a good thing for the consumer.

Given the flexibility of conventional loans, we have not been using FHA by and large for many years. Back in 1990 when conventional lenders were using 28/36 to qualify and wanted at least 5% down, I used FHA to jump to 3% down and higher ratios. But let's stay in the present. I've learned that most consumers find the present confusing enough without the history lesson. LOL

Thank you again for your comments. Tell me. I have said that front end payments over 40% should be avoided unless you have "hidden" current or future income that the lender is not using. Do you disagree? I have been saying that 28% front end will be the most comfortable for a family with children and 33% might fit for single professionals with no kids, especially if they have two incomes in the household. Without going to the back end, do you think people should exceed these limits without being told they are exceeding a "pre-ordained" comfort zone?

Many people today do not want to be "house poor", working every day just to make their housing payment. If they better understand what is happening in the home buying process, they will be better able to lead more balanced lives. That's my premise anyway. If they can readily afford a house they can enjoy without stretching the limits, we shouldn't be pushing them up to "the sky's the limit" just becuase we make more money if they buy a more expensive house.

ARDELL
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Nov. 22, 2007 - RE: Predatory Lending

Posted by Wade Young
Predatory lending takes many forms. Another form of predatory lending occurs when a borrower is led to believe that their credit isn't that good. The borrower comes to the mortgage broker, saying, "My credit isn't that great. I hope I can qualify." The mortgage broker pulls credit and discovers that the borrower's credit is good, actually very good. The disconnect happens because the scoring system places the most importance on the previous two years. Since the borrower has been squeaky clean the past two years (their credit sins more than two years ago), the score came back A+. However, since the borrower believes that the score is poor, the mortgage broker lets the borrower keep thinking that way. This enables the mortgage broker to make more money on the transaction by putting the borrower in a sub-prime loan, which pays better. A significant percentage of the sub-prime loans out there are actually held by prime borrowers.

The lesson? Predatory lending, as Ardell illustrates, comes in many forms. Borrowers need to educate themselves. The first thing any borrower should do is go to  www.annualcreditreport.com. The borrower should select ONLY the Experian (as they only have the true FICO) report and upgrade (for $6.95 I think) to get the FICO score added to the report. This will tell the borrower what sort of borrower they really are so that they aren't duped by an unscrupulous mortgage broker.

www.reddoorhomeloans.com
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ARDELL DellaLoggia of Sound Realty on Seattle Real Estate process and market including Kirkland, Bellevue, Redmond, Green Lake and most areas around the top of Lake Washington North of Downtown Seattle. Phone: 206-910-1000 - Mailto:ARDELLd@gmail.com

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