Stretching Your Loan Qualification? Which Mortgage Is Best?

Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

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.


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Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Excellent and timely info provided here, Rob Spinosa ... thank you for sharing it.  

The temptation to "max out" and stretch yourself regarding mortgage qualification can be great, especially in competitive housing markets.  And that makes the choice of LO even more important for those considering mortgage financing.  

Borrowers need to work with an LO that provides them all the options available to them ... but is also willing and capable of thoroughly addressing the pros and cons of each.  For that reason and many others, consumers in the San Francisco Bay Area in need of financing information and guidance are wise in seeking your services out ...


May 19, 2017 12:35 PM #1
Dick Greenberg
New Paradigm Partners LLC - Fort Collins, CO
Northern Colorado Residential Real Estate

Hi Rob - Thanks for a very helpful post - buyers here are obviously going to need to reach a bit higher as prices increase in our market.

Have a great weekend!

May 19, 2017 01:14 PM #2
Dörte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear Rob,

In your market that makes total sense. After 7 years, those buyers can just pay off the mortgage, if their stock options vested by then. Just kidding, but hopefully, they will have gotten a few raises by then.

May 19, 2017 06:57 PM #3
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

I don't think it's in the best interest of any borrower who wants to stretch or leverage their purchase of real estate.

Consumers should have a comprehensive financial analysis before searching for a primary residence. That includes adequate asset protection, minimum 6 months income reserves and an exit plan should an unforeseen catastrophe occurs.

The professional should always be looking out for their client's ability to live within their means without any stress or anxiety about their financial obligations. Instant gratification usually causes adverse consequences, sometimes sooner than later, so, being prudent and sensible without using leverage IMO is more appropriate.

May 20, 2017 02:39 AM #4
Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Thank you for the post. I will bookmark it and share with others 

May 20, 2017 03:09 AM #5
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

Guaranteed these conversations take place and more. Good post if Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi  showed up

May 20, 2017 06:41 AM #6
Rob Spinosa
Guaranteed Rate, Marin County, CA - San Anselmo, CA
Vice President of Mortgage Lending, Marin County

Great comments, all, and I appreciate them.  I do think it's worth saying that I'm not advocating for someone to stretch his limits, but I am trying to show how it can be done within the confines of what's available.

It's easy to assume that "stretching" means bringing a household to its max.  This is not always the case where guidelines are rigid.  If you a have a spouse that cannot go on the loan because of some guideline, qualifying income gets cut.  This doesn't mean that the household cannot afford the payments, it means that they need to find a loan program to get their purchase to work.  

I am "pro choice" when it comes to options.  Regulators have severely constrained credit access to consumers.  Those borrowers who are left need to know how to navigate the new world order and use the rules to their advantage and that sometimes means using a program that is actually riskier than they'd sensibly be approved for if additional options were not labeled as harmful by the laws that govern our industry.

We see a lot of jumbo loans here in the San Francisco Bay Area.  Most of those are capped at a 43% DTI, for better or worse, because that's what the law says is the limit.  We also routinely encounter situations where the borrowers have to jump through flaming hoops to make this work.  Again, not because the buyer wants to redline his/her budget, but because the guidelines are inflexible and do not consider the uniqueness of their scenario.


May 20, 2017 06:46 AM #7
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Thanks for a very informative post on best loan practices.

I am a real estate agent, not a lender. I try to find the best LO that will guide the consumer to the best product for their needs.


May 20, 2017 08:06 AM #8
Walt Fish
Bay Area Home Inspection, LLC - Marquette, MI
Upper Michigan's Most Experienced Home Inspector

Very informative post Rob! Thanks.

May 21, 2017 06:38 PM #9
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Rob Spinosa

Vice President of Mortgage Lending, Marin County
Can I Get a Jumbo Loan with 10% Down?
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