mackguyver

28/36 Rule and the Mortgage Market

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My wife and I are hoping to buy our first home in the next 3 months and the 28/36 rule is rearing it's ugly head. I have an MBA and my wife is a lawyer, so we make good money, but we have over $1500 in student loans which is knocking almost $250k off of how much house we can afford using the 28/36 rule. We're currently renting a nice house and making a fairly hefty rent payment which pushes our ratio to something like 15/50.

I have read that lenders are willing to go outside the ratio, but my scores are in the high 600s (filed Chpt. 7 in 2001 - but perfect credit since then) and with the whole subprime mess, I wonder if anybody would even be willing to make this work.

Has anyone worked outside the 28/36 rule recently or does anyone know if lenders will still do this, especially for someone below a 700 FICO?

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Debt ratios in excess of 28/36 get approved all of the time through automated underwriting, and even up to a 65% debt ratio still gets qualified today. Your BK will have minimal impact unless you are going for a Jumbo loan amount. If you care to share details about your situation, including income, reserves/assets, required monthly minimum payments, and anticipated sales price/down payment, the mortgage pro's here can give you specific advice to your situation.

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mackguyver - (cool name)

You have alot of options - being that your BR is over three years old, you could look at an FHA loan. The DTI (debt to income) ratio is 43%. This is a full doc loan, insured by the government.

The benefits are a lower interest rate, low required down payment (3% down), and the PMI is only .05% yearly.

With these types of loans, you can only go up to a loan limit for your county. See link for Florida https://entp.hud.gov/idapp/html/hicost1.cfm

However if your purchase is above the FHA loan limits, plus you have alot of bills. You could look at a stated income loan. Depending on your credit score, will require how much you have to put down. PMI on conforming loans are around 2.74% yearly.

To eliminate PMI, many people do a first and second mortgage. I personaly don't like structuring a loan that way, because it will take longer before you develop any equity.

Example: in the last few years in Florida, home values have gone down. People would purchase a home doing a 1st and 2nd mortgage. Because the 2nd is a higher interest rate and your only billed the minimum. A few years go by, people found out they oue more then their home was worth.

Structuring one loan going conforming - less than 20% down you will pay PMI, but you can claim that of your taxes.

Another way you can do a loan is to go non conforming. The interest rate is alittle higher, but you eliminate the PMI.

I also suggest you get a copy of your credit report, to know what's on there. That way you can disbute any wrong information. And the second reason is that when your shopping for a loan, you will have your credit scores to give the loan officer. You do not want to have your credit pulled over and over again, because it will lower your credit score.

One last piece of advise, the bank will require you to pay for an appraisal. Do not let them order it for you. Order your own appraisal. That way if the numbers change and your not happy, you can change banks without paying for another appraisal.

Hope this helps you........:)

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You, as the homeowner, cannot order an appraisal that will be usable for mortgage financing... you may help select the appraiser, but it has to be lender/broker who orders the appraisal as they must be the "client" listed on the appraisal.

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Structuring one loan going conforming - less than 20% down you will pay PMI, but you can claim that of your taxes.
The ability to deduct MI is very restrictive with respect to income. AGI over 110k for a married couple = no deduction at all. with an MBA and a an attorney as a couple, it is likely not an available deduction for a primary residence.

Also, to my knowledge, this is only available for 2007 purchases and will sunset at the end of the year unless Congress affirmatively votes it back in.

One more thing mack, you are a victim of the marriage penalty twice here. My guess is that because you are married, your joint AGI will disqualify you for both the MI deduction (fairly insignificant anyway) and the student loan deduction (VERY significant). Congress has decided that marriage is expensive. :evil:

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Thank you guys for the detailed and informative replies. Yes, we make over $110k (for the first time - my wife is a new lawyer) so I fear we'll get hit with the AMT this year, and I'll likely need to hire an accountant for the first time. We don't have much for a downpayment and what little we have set aside (not easy putting the DW through law school for 3 yrs) we'll need for earnest binder, inspections, moving and other costs, not to mention for repairs & emergencies.

The homes we're looking at are fairly modest - for FL - but are well above the FHA limits for our area. It goes without saying that our income disqualifies us for nearly every downpayment / mortgage assistance program and it sounds like most tax benefits.

My main concern was about the 28/36 thing, because we're looking to finance about 15% mortgage/income of the 28%, but even that puts us far and above the 36% to somewhere around 50% primarily because of the student loans.

From the research I've done on mortgages, I think the 80/20 loan is probably best for us so we can avoid throwing away good money on PMI.

I'll let you know how things go - we're just starting to look at homes and we're in our lease 'til January, so it may be a little bit before we apply for a mortgage.

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Mack, I'm in the same boat. Decent combined income but lots of student loans (roughly 80k right now). We purchased our first home on my wife's credit and income alone (prior to marriage) because of this reason and because of my poor credit two years ago. This means that we live FAR BELOW our means. But it has opened up a world of opportunities, like a purchase of a rental property this year, making lump sum payments to reduce the piggyback loan on our primary residence, stashing away roughly $17k in pre-tax 401k deductions every year, and starting a ING car fund so we can pay cash for our next cars.

So, yes you'll be able to find a loan, but maybe not for as much as you'd like. But this may not be a bad thing!

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From the research I've done on mortgages, I think the 80/20 loan is probably best for us so we can avoid throwing away good money on PMI.

I'll let you know how things go - we're just starting to look at homes and we're in our lease 'til January, so it may be a little bit before we apply for a mortgage.

I hate to break it to you bro, but there is no way you will qaulify for the 20% portion of an 80/20 with scores like that, nor would you want to. The \subprime catastrophe has left 100% financing investors unwilling to loan to anyone except those with 720+ fico. Even if you can find such an investor, the rate on the 20% will be near federal maximum of 12.75%.

The 28/36 rule is for the most part esoteric now. It came from FHA loans of yesteryear (i hear former homeowner in your voice ???) Conforming, or fannie/freddie guidelines, allow as a guideline 50% back end ratio. As someone else pointed out, with an AUS(Automated Approval System, the loan officer runs your credit and loan application through this program), the result will approve or deny, with a numerical representation of risk. SO, if you are approved, your DTI ratio is for the most part irrelevant. I have seen very high (60-70%) ratios sneak through this way.

The loan programs that allow high ratios like this will have several things in common. 1. They will be loans for less than 417K. 2. They will have rates in the 6.5-7% range, and they will have mortgage insurance, no 80/20 3. They will deal with credit no lower than 575, and you must have some solid payment history.

Also, I dont know what rate you are using to calculate the mortgage payment, that you are using to calculate your DTI. You could be very high or very low and all our guesses would be off. 2 more places to look for a loan:

A. FHA. Goverment loans are back in style, I've got 50% ratios funded. Plus, the rates on a 30 year fixed are about 6.25%, regardless of credit. That's right, no minimum credit score. Also, there is mortgage insurance, but it is very cheap, and the seller could even pay it. Many other benefits.

B. ACORN home loan program. Take everything I just said about FHA, knock that rate down .75%, allow 40 year and interest only loans and take away the PMI, and you've got acorn. It's a government subsidized program, a community redevelopment thing at way below market interest rates. It's prettymuch the sweetest loan on earth if you can get it, but is only offered retail (that means no brokers and no wholesale; nobody else) by Banl of America and Citibank.

Happy loan hunting.

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