Home : Blogs : Jason Sardi, Mortgage Banker : Real Estate Financing, The Insider's Insight On Mortgage

Ask The Loan Officer: Don't Be Mortgage Poor!

Ironically, today was the first time I had the pleasure of speaking with Lenn Harley. Being the end of the month, it was a hectic day and I really wasn't sure if I could meet the contest deadline. So, I scrambled to get my entry in last minute. I hope this will give prospective buyers, wherever they are located, a bit of insight they may not have already had.

I'll get to what I feel is one of the more attractive options I can offer folks from my end. I would also advise that folks talk to a reputable FHA Approved Lender to see if that might be the better option.

From my end, let's assume the following hypothetical scenario ... based largely on Lenn's illustration in her post.

Sales Price of $605,000
10% Down Payment ($60,500) Loan Amount of $554,500.
Like Joe Adams before me, I'd opt for Lender Paid Mortgage Insurance as a viable option (as we are borrowing more than 80% of the Sales Price). This Mortgage Insurance is built into the Interest Rate and translates into a higher rate.
As of the end of the business day today, my Interest Rate on that product was also 6.875%. That translates into a principle & interest payment of $3644.52. Assuming taxes work out to be about $500.00 a month and Homeowner's Insurance is at $100.00 a month, the total monthly payment would be about $4244.52.

Lenn said the average income in that area was about $123,000 a year. That's $10,000 and change a month coming in as income. Bear in mind, this is Gross Income ... before Uncle Sam gets his take.

I want to talk real fast about Debt Ratios. Hopefully, in terms everyone can understand. Lenders calculate both your front end and back end debt ratio. Your front end debt ratio is simply the total mortgage payment (including taxes and insurance) versus the Gross Income coming in the door each month. In this example, the monthly payment would be $4244.52 vs. a Gross Income of $10,000 a month. We are over the 40% ratio ... just on the front end! Yikes!! The back end debt ratio takes into account your total mortgage payment and all other monthly debt (showing on credit, including things such as child support) but doesn't take into account such things as Utility Bills, Groceries, the beloved cost of Gas, etc. A car payment here, a student loan there, and all of a sudden we are dangerously close to being at 50% on the back end!

As a general rule, lenders want your back end debt ratio to be under that 50% mark. There are exceptions to that rule, like lots of money in the bank and/or retirement, a super strong credit file, a very stable job history, low LTV's, and the like.

Consider for a moment that just because the lender works up the numbers on paper and qualifies you, doesn't mean that's going to be a comfortable payment at the end of the day. There is a term called Mortgage Poor where you are struggling month to month just to pay the mortgage and all your other bills ... with little, if anything, left over. That's not a good place to be ... part of any competent & ethical Loan Officer's job is to look out for your best interests now and down the road, advising accordingly.

In this hypothetical scenario, there are a few other product options I'd sit down with the client to consider. They include but aren't necessarily limited to the following:

Interest Only Loan
40 Year Mortgage
1st Mortgage & 2nd Mortgage Split, avoiding PMI altogether.

The numbers in this hypothetical are tight and the level of comfort with the payment options for the borrower should be looked and considered very carefully. At the end of the day, your mortgage payment affords you a roof over your head. At the end of the day, you fall asleep at night. You shouldn't be worrying about that very payment or roof.

I'd like to see more down payment in this scenario, if at all possible. Options could get them in the door but I'd be leery of it hitting them on the posterior after it shuts. It's doable, but I'd tread cautiously in helping them out.

Speaking with Lenn today, she mentioned that the inventory in her area is massive. It would also be advisable to take a long gander at that inventory as a buyer ... perhaps there's something even more affordable on the horizon.

Jason Sardi

Mortgage Consultant

First Choice Equity Group Inc.

610-439-2166 ext. 229

jsardi@fcegi.com

Licensed with the Pennsylvania Department of Banking.

Posted by Jason Sardi, Mortgage Banker on 07/01/2008 12:24 AM

Comments (34)

ask the loan officer, lenn harley, pennsylvania mortgages, allentown mortgages, loans in pennsylvania

Originally posted at: Real Estate Financing...: Ask The Loan Officer: Don't Be Mortgage Poor!

Post is included in group: Mortgages
Post is included in group: New Jersey & Pennsylvania -- Realtors/Loan Officers/Title Clerks/Real Estate Lawyers
Post is included in group: Delaware County, PA
Post is included in group: Posts to Localism
Post is included in group: ASK THE LOAN OFFICER

34 Comments on Ask The Loan Officer: Don't Be Mortgage Poor!

JUN

2008

Jason~ I Love that line--- DON"T BE MORTGAGE POOR!! The sad thing is MOST people are mortgage poor. I personally advise and always have advised all of my clients to avoidbeing mortgage poor and spend less than advised on their homes. Not all have listened, but they have been advised.

Vickie - In the end, that's all we can do ... advise. Sounds like you advise your clients wisely. Thanks for stopping by!

Jason: GREAT information for buyers out there, struggling with the 'great prices' and wondering if they should risk going too high on a mortgage just to capture a great deal. Going UNDER the pre-qual number is ALWAYS my goal and I stress that importance to the clients as well--MANY agents & lenders don't and it makes me wonder how they sleep at night!

Debe in Charlotte

Jason,
I have seen here many FHA loans these days in Colorado, the reason is because conventionals they ask 5% down in a declining market or sometimes 10% and FHA they do not regulate that, just the normal 3% down, also you can ask for assistance for the 3% down and 3% for closing costs with those FHA Loans. good blog.
Ray Saenz

I have no idea how you do it. You'd think by now I'd have the key into your secret writers soul, but this is yet another example of how you amaze me with your ability. This is simply stellar, and knowing what I do about your crazy day, I am even more impressed. Quite simply: You Rock!

"...part of any competent & ethical Loan Officer's job is to look out for your best interests now and down the road, advising accordingly."

If I didn't love you enough already, your professional ethics would win me over in a heartbeat. (That along with the fact that you are so darned cute!) Can you imagine how different our country would be right now if everyone in our industry felt and acted the same way? One transaction at a time, you WILL change the world Jason.

You win First Prize with me baby!!!

JUL

2008

Jason, mortgage poor is never a good place to leave someone. It adds stress and prevents them from really enjoying their home.

Jason- You are an ethical mortgage broker and those are hard to come by. Any Client that gets you to help them get a loan is in good hands and very blessed. This is a very detailed and thought out entry. Mortgage poor, or house poor as we call it here, is not a good place to end up.

Mortgage poor... the last thing on earth I would ever want to do is be married to my house. Excellent post buddy. Very clear and concise.

FHA has defiantly been the saving grace for quite a few borrowers.....just heard a couple of weeks ago that hits on credit score below 600 for FHA are going to be 2.5% or lower based on a sliding scale depending on score starting this week. Good write up! I definitely share your desire to do all you can to look out for the consumers best interest.

Jason,

Like I always say...the more money down the less chance of you going under and getting buried.

Jason: I have been in Chicago without Internet so have no idea what contest you are talking about....did this have something to do with the obvious Localism contest?

I want you to know that I think you did a fabulous job of gearing this post straight to the consumer. It is easy to read, and easy to understand, and really de-mystifies the process of understanding how much house you can qualify for.

Bringing up the delicate issue of "just because the bank will qualify me, doesn't mean I can sleep at night" is something we should all think about before forging forward.

And yes, I agree, that we as loan officers, carry the resposibility to offer "sleep sounder options".

Congrats on the star, bookmarked because I think it is basic stuff that could be used over and over again with clients.

PS And many LOs were rusty here from way too many stated income loans, now extinct.,

Congratulations on the feature!! MWA!!!

Jason,

You raise some valid points. Great post---I enjoyed your content.

Jason, well done sir...... Many many otions still out there for this client. I still have an investor do 50 year am (crazy) 3 year and 5 year piggybacks might work....... it really comes down to the client and what their "overall" picture is and one thing that sometimes helps is that they are in a position of "increaqsing income" ie...... the union plumber that is coming in this afternoon. His cost of living raises and merit raises are all part of the contract and maybe be a compensating factor for the underwriter..... personally I tell my clients to sit down and make a REAL BUDGET..... what they can afford and still have "date night" and other things outside

Jason,

good job unfortinetly this sounds like this faux barrower is just another person buying a house that they realisticly can't afford. (BK in the making?) Also Lenn makes the coment that this is still in fha range? On this loan amount @ 6.5% no lender would give that loan amount at that rate right now not even close especialy at that ltv. Sounds like this guy needs to find a different house.

Jason.... well done on some of the explanations.... but here is a huge pet peeve of mine, when people write a posy giving rate and example. Two things missing.... APR... if not, the costs need to be spelled out. There is no true comparison to what you mentioned in your rate from yesterday.

Secondly.... you give an example with holes in it. Not trying to sound rude, just direct. Even though Lenn might have given this in her post, you didn't link to her post or mention it here. FICO scores... your rate and scenario are based on ratios and giving a rate. But as a loan officer, I am not sure if the rate is good or bad.

Lastly... you mention high ratios.... can you do this on a Jumbo loan? Talk about an Approved/Elligible? In my honest opinion, rate is irrelevant if it's not approved in the system. Sure, you bypass MI, which is very hard on ratios and approaving loans. But knowing fico score and your total charges gives me a better explanation of what you are charging.

Overall, your best point that has been mentioned, ypu said....... "Consider for a moment that just because the lender works up the numbers on paper and qualifies you, doesn't mean that's going to be a comfortable payment at the end of the day. There is a term called Mortgage Poor where you are struggling month to month just to pay the mortgage and all your other bills ... with little, if anything, left over."

On another note.... thanks for the polite mention....

jeff belonger

Jeff - First off, click on Lenn's name in the very first sentence of this post. It links directly to her post.

I didn't dive into APR and my costs because, quite frankly, I thought the nature of this post and contest was about whether or not the home was affordable to the borrower. So, I concentrated on total payment and debt ratios to illustrate that point. To get into APR, costs, & such would have gotten off that point ... which was to decipher on whether the borrower could afford.

As far as the loan being approved and talking about a hypothetical credit score, again, I wanted to keep this site and to the point. With this hypothetical, I was assuming the credit score was high and credit worthiness was there. I was also assuming they were approved in the system. I wanted to concentrate on affordability, which I thought was the backbone of the contest. Perhaps I should of attached a hypothetical GFE and TIL ... however I don't know how to do that on posts and didn't want to overcomplicate the matter. I hope this addresses those concerns ....

As far as the mention, anytime! I see you caught that link:-)

Josh - Those were kind of my thoughts. I think this is very doable ... I just don't know if it is the best decision to be done with the hypothetical sales price and down payment.

Joe - Well put. Those '50' year products are crazy! I didn't mention it because I never closed one of those. They are probably pretty popular in states such as California & New York though.

Diane - Thanks. I hope you were able to take something away (positive & enlightening) from it.

Jennifer - MWA & FWA!

Janet - Thanks! I heard a vicious rumor that Stated Income Loans will become illegal in the State of Pennsylvania. I was never a huge fan of them, but they are a legit product for some situations. Our Government providing more legislation for the Mortgage Biz, that's another post entirely.

Neal - It's not always possible, especially in really high priced areas but I believe you are right. Besides, 100% financing and 'little to no money out of pocket' had us a bit too spoiled for safety.

Christy - As I mentioned, I would advise the client to seek advisement from a FHA approved lender. I'm not sure the ratios would fly, but it worthy of consideration.

Jesse - Thanks man! Seems to me that being married to your house can be even more expensive if it ends in a divorce, so to speak ...

Katerina - Thanks! I tried to keep it concise and not too overbearing ... while keeping the bottom line front in center.

Christine - Sure does. I'd hate to call them a few months down the road to see how they are doing and find out the number is disconnected.

Jason,

Good information. I have always counseled my clients in what makes a comfortable payment. Not long ago it was possible to get an approval for someone with a 60-70-80% debt ratio. I actually got approvals over 100% DTI. The question is always, not if they qualify, but can they really afford it.

Jason, great feature post. I know many in our area got into this mortgage poor situation and inevitably they had to sell the house or it went short sale or they took a huge loss to get out of that burden. Who would want such high debt ratios? This was from an area that had very affordable housing but people bought five bedroom homes with just two people. I thought you raised the awareness very well going in to keep those ratios as low as possible to do other things in your life with your money besides paying it all on a house loan.

Jennifer- You are too good to me sweetie! Thank you so much. Years ago, I really wanted to ingest more humanity into the financing side of things ... sometimes, for better or worse. MWA!!!

Ray- FHA is definitely being billed as the soup du jour. It's a great product for some people. Good to see you around again.

Debe - I wonder that same thing all the freaking time.

Fred - Your last sentence speaks volumes. Approvals at 70%, 80%, or 100%? Yikes, that's scary!

Gary- The long term affects can be disastrous. Part of our job when counseling and working for folks is to look out for their best interests down the road. I'm pretty darn sure you do just that.

Jason,

I actually closed one loan with a 124% back end ratio. Of course, he was moving, recent phd graduate, didn't have a new job yet and had enough cash to pay for the house 3 times over and had a near 800 credit score. Still, automated no longer does those stupid things.

Fred - They say you learn something new every day, especially in this business. I would never of thought .... WOW!

The way automated used to work, I would always run it conforming first before I did a stated income or a no doc. Same customer but sometimes the automated worked. I know it was strange, but I saved a lot of stated/no doc customers money.

Jason,

i agree there has to be a real program out there for people who want to buy a home and have little money down but I think by having strict guidelines will keep out the ones who were abusing it. This way people can keep their homes instead of losing them later.

JUL

2008

Fred - I hear you there. Strange business, isn't it?

Neal - With those thoughts, I agree. I'm a firm believer in any "No or little money down" transaction ... reserves are a must.

"I thought the nature of this post and contest was about whether or not the home was affordable to the borrower" Jason you are a great blogger cause I would have lost with my one word blog

NO!

lol keep up the good work!

You may have just won the contest Josh:-)

Great post Jason. You obviously take a consultative (not transactional) approach with your clients. Neal, your comment is true....sort of. Generally, people that have saved up substantial down payments are inherently fiscally responsible and thus are much less likely to default on their mortgage. However, simply putting more money down doesnt always translate to a safer, more secure position for the buyer.

Lets say a young couple has $10,000 liquid cash, and say $4,000 in total retirement savings. They are buying a home for $10,000. Should they put 10% down, or go FHA with 3% down? Its true that by putting 10% down they will have a lower payment. but probably only by $42-$50 per month or so. Has their risk of foreclosure gone up because their payments are $50 more per month? No, not really. Plus, but putting less down, they now have $7,000 that can be set aside in an emergency fund (or invested if they already have that fund set up).

Putitng down the highest possible down payment is often NOT advisable. It depends on each client and their specific situation.

That is why every loan application is different. That is what is wrong with internet mortgage companies. They want to get every square peg into their round hold. Personal contact with people is the right way to do this business.

JUL

2008

Robert - Thanks and good observation. I believe to do this job the right way, we have to take a consultative approach. I hope and believe I do that to the best of my ability. You make a heck of a point regarding emergency funds. That's crucial in a world where you never know what may happen next.

Fred - Agreed, I'm starting to like your line of thinking:-)

As always, thanks for all of the tips. Glad you're using the network within Activerain. It works!

JUL

2008

Jason - Like Janet - Been out of town. Congrats on a difficult scenario! As you and Jeff mentioned - it's a stretch deal. I think it speaks to Lenn's overall question in her original post... can the Average "worker" making the "Average Salary" in Fairfax buy the "Average House?" And the answer is maybe.

JUL

2008

So Jason are you going to tell me that if this hypothetical situation were real and you advised the client that you didn't think this was a good move for them seeing as though they'd end up "mortgage poor" you would actually not do the loan? Suppose the couple already fell in love with the home so and couldn't be talked to one that was more in their price range and reject all of your other options:

1) They don't want an interest only because they heard in the news they were bad and they want to build equity.

2) 1st and 2nd mortgage split would avoid PMI but probably not change the payment much as the second would carry a much higher rate.

3) They don't want a 40 yr loan because of their age and they want the house paid off before retirement.

What do you do?

Tracy - You are right there, have a great week!

Eleanor - Bingo, I thought you did an excellent job with your entry as well.

Above All Financial Services - Well, the three options you pointed out weren't the one I laid out as the product I'd use, though I did make a point that those are other options we might explore. As far whether I'd do the loan for them, good question. I was always taught that if you had a loan approval for a product and the client wanted it (even if you advised it's not in their best interest) you'd have to make them the loan. With news laws & regulations, I'm not sure how that would be interpreted these days ... but I would advise according and if they are approved for the loan product, I feel I'd have to honor that approval.

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?