Rates are trending a little lower over the past week with a lot of this based on the sentiment that the economy isn’t recovering as quickly as the Federal Reserve would like investors to believe. Of course, this is all based on emotion and speculation and can easily change in the coming weeks.
I was reading this article http://money.cnn.com/2011/04/19/real_estate/low_risk_mortgage_denied/index.htm on mortgage’s being tougher to come by over breakfast this morning and although I do agree with the general sentiment that loans are more difficult for borrowers to get approved than they were two years ago I have to go over the fact that I disagree with a few of the points they bring up. My opinion on why loans are more difficult is because Lenders now require much more extensive paperwork to verify information from the borrower such as money transfers for down payment and other income/debt and asset related endeavors. The part I don’t agree with is based on the statements made in regards to DTI or Debt to Income Ratio. I do think this is in part due to a lack of understanding of what this number is. Many standards have reduced the approval ratio from 55% to 45% but I believe this is for the best. The 55% number is based on the borrowers total monthly payments listed on their credit report which would be any loans or credit card payments plus the new total mortgage payment divided by the Gross income amount of the borrower (so the before tax income, not take home pay). So, if a buyer makes $48,000 per year before taxes ($4000 per month), their new mortgage payment will be $1500 and they pay $300 towards a car and credit cards for a total of $1800 in debt payments, their DTI comes out to 45%. $1800 is 45% of $4000. Ok, so after the mortgage and loan payments, the borrower has $2200 left which sounds pretty affordable. The problem that arises is the borrowers take home pay is most likely closer to $3000 after taxes, leaving $1200 to go to gas, groceries, TV, phone, computer and the numerous other monthly bills that add up. Previously, those same numbers would leave a buyer with $800 per month if they went up to a 55% DTI scenario. For a family, that is going to make a mortgage payment very hard to come by if any out of the blue expenses come up.
I always suggest to my buyers to first go over their budget and decide what type of monthly payment they can afford so we don’t end up putting them in a larger home than they can afford based on what they can get approved for. The DTI approval limit was lowered because too many homeowners purchased more than they could afford in reality. This guideline isn’t making it more difficult to get a borrower approved, it is making it more difficult for a borrower to be approved for more than they can afford. Here are where today’s rates are trending Rates: 30 year fixed at 4.75% and the 15 year at 4.125%, FHA: 4.50%: As always rates change with individual credit scenarios and programs, with credit in the mid 700s and a 20% down payment these rates are what you should be seeing.
Have a great week!
Matt Royer Mortgage Consultant, CMC | Homes Mortgage