WHEN YOUR CREDIT CHANGES
It's a combination car, pickup
truck and SUV. You really want it. The features are
great, the style is the latest, and it's affordable after
the down payment, the cost
is only $300 a month.
"Would you buy this car today if I can include the genuine wood grain, rubberized
side moldings?" asks the salesman.
Before emitting a strong "yes", stop and consider what's about to happen. You will
be increasing your debt load and monthly payments, things which make mortgage
lenders edgy. If you want to buy a home in the coming months, you need to
carefully consider your financial choices.
The issue here is not cars. If you need a car for safe travel, then safety comes first.
But if you merely want a new car or
music system, an antique guitar,
a trip abroad or anything else that increases your monthly costs and is not
absolutely and unquestionably necessary then
you should think about mortgages,
debt and ratios.
Lenders don't like risk. A lender's view of financial perfection means making loans
to borrowers who always pay their mortgages. Alas, some people don't repay,
lenders need to limit their risk. They do this by checking the value of the house
with an appraisal, and by ensuring that borrowers are well qualified.
The expression "well qualified",
as lenders use the term, means something more
than finding borrowers with good incomes. Yes, lenders want sufficient income for
any level of borrowing, but they also want something more: a sense that borrowers
are not burdened with too many bills. To lenders, this means limiting debt and
Lenders typically qualify borrowers on the basis of two measures: front ratios and
back ratios. In general terms, these standards work like this:
The "front ratio" is the percent of your gross monthly income used for mortgage
principal, mortgage interest, property taxes and property insurance. Depending on
the loan program, lenders might allow 28 to 41 percent of a borrower's income for
The "back ratio" includes PITI, plus car payments, student loan payments, credit
card payments, auto loan payments, etc. Back ratios typically range from 36 to 41
percent, but can be greater.
What to do?
Defer major expenses until after you have closed on your home.
Do not apply for a mortgage, obtain approval and then take on more credit or
installment debt before closing. Lenders recheck
credit reports just before
settlement. If they see new and unacceptable levels of debt, the mortgage
may be declined.
Obtain a smaller mortgage by paying more cash up front.
Pay down other consumer debt to reduce monthly payments.
Consolidate bills to obtain lower monthly costs but
be wary of long term
expenses and transfer fees.
When possible, switch from high cost
credit cards to lowercost
smaller monthly costs. Be wary of higher future rates and transfer costs.
Look for mortgage programs with more liberal qualification standards. If you
have a strong credit history, such financing should be readily available.
Ask if lenders can consider "compensating factors" which may allow you to
If you need more information, please feel free to call with questions regarding
mortgage options and qualification standards.
We certainly hope you enjoyed this information. Please feel free to
forward it to anybody who might benefit from it.
Jack Ferrari- Realtor 352-231-2283