Ask The Expert
Ask The Expert
Getting a Mortgage: How Much Income Do You Really Need?
Dear Jeff,
People like to use the 28-32% figure as a rule of thumb, but you are an individual and you are buying a house, not a thumb. So here's a little inside information about how underwriters (even the computerized ones) look at the whole picture and where income fits in.
First, a look at a mortgage calculator may tell you that your desired house is out of your range. Don't let that stop you--it's just a guesstimate. Other factors matter as much as or even more than income. For example:
- Credit rating. Demonstrating that you have the ability to successfully manage debt can help an underwriter justify stretching your ratios a bit.
- Lack of payment shock. "Payment shock" is what's called the difference between what you are currently paying for housing and what your new payment would be. If your new payment would be $1,000 but you have been paying $1,500 a month for rent, that's an excellent indicator that you deserve a prime loan at the best interest rate.
- Increased income expectation. If you just graduated from college (hopefully law or medical school!), then you probably can expect a substantial increase in income and should expect to be able to manage a payment that's a little high now.
- Assets or reserves. If you will have money available after you make your down payment and take care of your closing costs, that amount is called "reserves." Underwriters take that amount, divide it by your monthly bills, and see how many months you could get by on your reserves if you had an income glitch (like a job loss). At least six months' reserves make you a golden person.
- Buying an energy-efficient home. Some lenders will approve a higher debt-to-income ratio if your home meets certain efficiency guidelines. Because they know your utility bills will be lower, you're allowed to spend more on your home.
- And finally, working for the government. If you don't have to pay into Social Security, what you don't pay is added to your qualifying income and can help you get more home.
So, when looking for a new home loan or refinance, if you want today's best rates, work with a loan pro who knows what he or she is doing. There are lots of ways to help you get the home you want, and the right person can help you do it.
Thanks for writing,
Liz
Recently Asked...
Can I buy a home by taking over someone's mortgage?
I found a company that will sell me a list of homes that can be bought by taking over someone's mortgage. I have some credit and income issues so this would be very helpful to me. Is this a legitimate way to buy a home? Do mortgage lenders let buyers take over the payments if the seller is behind on the payments?
Taking over mortgage payments: the due-on-sale clause
Most mortgages funded in the last 10 years or so contain what's called an acceleration or due-on-sale clause. That means if the property changes hands, the entire mortgage becomes due immediately. Lenders don't want to find themselves in business with someone who may not meet their underwriting standards. While some government home loans like FHA mortgages may be assumed, unless the mortgage is over 20 years old, the buyer must qualify for the loan like anyone else.
How some people get around the due-on-sale clause
Some sellers will advertise an assumable mortgage with no qualifying, or that they'll allow the buyer to take over their mortgage payments. They try to circumvent the clause by transferring the property but not "selling" it. That dodge might mean calling the transfer a lease option, an installent sale, a land contract, a land trust or a wrap-around mortgage. These schemes are not illegal or fraudulent unless you conceal the transfer from the lender.
Could you get away with this? Maybe
If you take over payments from someone who is in default (and bring the account current) on an underwater home, the lender may breathe a sigh or relief and let you continue. But what if (when) property values or mortgage rates increase? In that case, you'd be in what's called "technical default" and the lender could choose to enforce the due-on-sale clause, meaning you'd have to pay off the entire balance immediately or lose the home. Unless you can get the lender to approve the transfer of the property and the obligation to you, you're taking a risk.
Concealing the transfer is a felony
If you try to avoid the technical default scenario by concealing the transfer, you're begging for trouble. A wrap-around mortgage, for example, involves the seller continuing to pay the old mortgage lender while you pay the seller. No transfer documents are recorded with the county.
The list is probably bogus
Unfortunately, the list being advertised is likely just a list of homes with FHA financing. You'd still have to apply and qualify with the current lender to take over such a loan, so don't waste your money.
Foreclosure sale: can you pay cash and then refinance?
I bought a home at a foreclosure sale with cash borrowed from my business. I need to put as much money back in as I can, and I need to do this as soon as possible. How soon after buying a home can I refinance it and get my cash back?
There are actually a few issues here; some need to be considered before others. So here we go:
- Is the property a home for you to live in, a vacation place or a rental? This determines what sort of refinance products you'll be able to choose from. For investment property or a second home, you'll need to refinance with conventional (non-government) mortgage lenders, and you'll be able to cash out a maximum of 75% of the purchase price. If the house is a primary residence, you may be able to refinance up to 85% with FHA or up to 90% with a VA refinance mortgage (eligibility guidelines apply).
- Do you want fast cash or more cash? If eligible for an FHA cash-out refinance, you can put up to 85% of the home's purchase price back in your pocket, but you'll need to own the property for at least six months before you're allowed to do it. With Fannie Mae's Delayed Financing Rule, however, you'd be able to refinance immediately and get up to 70% of your money back.
- What if the home's value has increased? In general, if you refinance within a year of buying a home, mortgage lenders base your loan amount on the lower of the purchase price or the appraised value. So even though you got a 15% discount by buying on the courthouse steps and paying cash, you won't get to pull that extra equity out when you refinance quickly. If you want to maximize your refinance proceeds, wait a year, and your loan is based on the home's appraised value.
This is a hot issue with investors these days because the best deals are generally unavailable to those who need to line up home loans. Investors need to recover as much of that cash as quickly as possible, so that they can turn around and buy more property.
Frequently Asked Questions (FAQ's)
I'm finally ready to buy my first home. How will the current economy affect my mortgage rates?
That depends on how much cash you're willing to pay up front and how well you've managed your money over the past few years. According to many experts, mortgage lenders have" rolled back" to the policies and protocols they used decades ago.
Hoping to avoid the kind of lending that led to the subprime mortgage crisis, most lenders
require higher down payments and higher credit scores from borrowers than they did only a few years ago.
If your credit has a few dings in it, don't worry. Be prepared to lock in something higher than today's best mortgagerates, and be prepared to pay extra origination fees in addition to your down payment. While you won't find many private lenderswilling to finance more than 80--90% of your home's value, investigate FHA and other community homebuyer options. You can use a stable employment history and community connections to find a fair financing deal.
Although I've made every mortgage payment on time for the past five years, our whole neighborhood has lost value and I'm upside down on my home loan. What should I do?
In certain cases, you might not have to do anything. If you locked in a solid mortgage rate during a previous period of low interest, keep making your payments. As real estate values normalize over time, you'll eventually regain home equity.
However, if your credit score is better now than it was when you originated your home loan, you may want to lock in today's best mortgage rates. Or you may qualify for a government-backed plan that can help your mortgage lender process a refinance. FHA, Freddie Mac, and Fannie Mae all have special money-saving programs. If your mortgage is backed or held by these entities and you meet some other qualifying criteria, you can cut the amount of interest you'll pay over the life of your loan.
