Stretching Your Loan Qualification? Which Mortgage Is Best?
Buyers will come to us, often after beholding the perfect home while out touring with their Realtor, and they will want to know the maximum amount they can borrow on a mortgage. Perhaps they just intuitively realize that their dream home will stretch the outer limits of affordability. Their question will be, "What is the maximum amount I can qualify for on a mortgage?"
At this point, they may ask about interest-only (I/O) loans or ARM programs to help them achieve their target purchase price, so let's play a little game of "Truth or Delusion" and cover some of the common scenarios:
1) "I'll just use an interest-only loan and qualify with the lower payment. Problem solved!"
Delusion. Your favorite regulators in Washington decided years ago that interest-only payments are a "toxic feature" in the new world lending order. As a result, lenders may still make an interest-only loan, but if they dare do so, they had better prove beyond a shadow of a doubt (actually beyond a rebuttable presumption...but that's another story) that the borrower has the ability to repay. The way they attempt to do this is by using a qualifying payment --- behind the scenes --- that is artificially high. They figure that if you pass this muster, making the actual payment, once you get the loan, will be a snap. But again, don't count on using your actual payment to determine your debt ratio (DTI). That went the way of the pre-crisis horse and buggy.
2) "OK then. I will get a 5/1 ARM, which has the lowest interest rate I am seeing. I will use that payment to qualify."
Delusion, again. Like with I/O loans, there is a "man behind the curtain" on the 5/1 ARM program. You can almost certainly count on your lender using the higher of the fully-indexed rate OR the Note rate (your actual rate for the first 5 years) + 2% to set your qualifying rate and payment. Now I realize that some of this loan lingo is going to make it confusing if you are trying to DIY your DTI. But, OMG, don't go through that trouble. LMK if you need help.
3) "No I/O, no 5/1 ARMs, well shoot. That's leaving me with a 7/1 ARM as the next choice. Is this the best way to maximize my qualifying power?"
Eureka! You've found the truth. Indeed, what we see most often and especially on the jumbo side of the qualifying scenarios is that a fully-amortized 7/1 ARM affords the best combination of features to help you achieve your highest possible loan amount. And the 7/1 is a great program too. You have seven years fixed at the beginning of the loan's term and we, the lender, will often use your start rate (also known as the Note rate) to determine your qualifying payment. It is very rare that the lender will adjust this rate with a factor (+2%, for example) and at this time, even a the loan's fully-indexed rate will fall below the Note rate. So, in short, the rate you are seeing is the rate you will get and use. I have consistently found that a fully-amortized 7/1 ARM is the best program for maximizing a buyer's mortgage qualifying power.
Right now, the housing market in the San Francisco Bay Area, and many desirable areas of California in general, requires that many buyers will need to reach a little higher in price point and loan amount to capture their dream homes. In the oppressively regulated Dodd-Frank mortgage environment, however, a lot of doors have been closed for the consumer and finding the perfect mortgage fit can be elusive. We can help with this dilemma and we have the programs and knowledge to do so. Get in touch any time if we can assist with the reaching of your goals.
Robert J. Spinosa
Executive Loan Advisor
NMLS: 22343 CalBRE: 01297944
Cell: 415-367-5959 Fax: 415-366-1590
1058 Redwood Highway, Frontage Road, Mill Valley, CA 94941
RPM Mortgage, Inc. – NMLS#9472 – Licensed by the Department of Business Oversight under the Residential Mortgage Lending Act. Equal Housing Opportunity.