Rule Of Thumb Says 3 Times Income

By
Mortgage and Lending with Equity Resources NMLS 67179 Licensed in NC

lhI grew up in this business, so I've had a lot of "rule of thumb" stuff I've squirreled away in the back of  mind.  One of my "old reliables" says that a borrower normally qualifies for 3 times their gross income. 

When Lenn Harley issued a Challenge to Loan Officers to see if the average buyer in Fairfax, Virginia could qualify for the average detached home - I was skeptical.  The average income is $123,000 and the average sales price is $605,511.  Three times the income means the borrower is looking for a loan of $369,000 - significantly below the 95% loan, Lenn says they are interested in, of $575,235!

605I know that the maximum FHA loan in Fairfax, VA is $729,750 - so if I need to do a "stretch loan" it's available.  Lenn's calculations, however, did not include FHA's Mortgage Insurance

The UpFront MIP charge for this scenario is 1.25%, after risk based MIP goes into effect July 14th.  The monthly factor for this scenario is .5%.  This means on Lenn's loan amount of $544,950 we would add $6,811.87 and calculate the P&I on the total loan of $551,762.  Then we multiply that TOTAL loan amount by .5% (and divide by 12) for a monthly MIP of $229.91.

Lenn had PITI at $4045 - with all the mortgage insurance of the FHA program added - I now had a monthly loan payment of $4,317.41!  So I decided to look for a cheaper loan program!

moneyLenn's property in Fairfax County Virginia is in a declining market... because of this, I'm going to have appraisal questions and PMI is going to be verrry expensive!

Old School - before the "Credit Crunch" last summer, we did 80/20's and plain ole 100% loans.  NOW we need downpayments - and fortunately Lenn said this client was putting 5% down.  If we keep the first mortgage under 70%, and at, or below the FNMA "normalized" limit we get best pricing.

And avoid PMI

So to qualify Lenn's borrower I did a 68-27-5 at a $605,500 sales price

first mortgage of $417,000 - (6.25%, 30 year fixed)

second mortgage of $158,000 - (7% Interest only 2% above Prime)

Total P&I of $4126

Ratio of 40/40 - I believe this deal works.

The borrower will need approximately $12,000 left after closing to qualify for this loan in reserves.  Because of this, I think the borrower really needs to have 10% of the sales price available in assets - 5% to put down, 3 payments and closing costs (and a few moving expenses maybe?).

I might need to reconsider my 3 x Gross for qualifying rule... but then... most of my clients come with 2 car payments and at least $10,000 in charge cards.  If this is the case - then we are cutting it CLOSE! (read: I ain't too sure it would fly!)

 

If you have a client in NC or VA looking for a mortgage - please refer them to Steve and Eleanor Thorne,Mortgage Loan Officers in Cary, NC  919*649*5058

Thanks Lenn!

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Rainer
40,460
Howard Wilson
Wilson Than Real Estate - Santa Monica, CA

Thanks for posting this rule.  With the misunderstandings of the market we're finding, I appreciate any clear and concise way of showing people the basics of such a significant economic decision.  Look forward to more of your posts!

Jun 25, 2008 10:14 AM #1
Rainmaker
635,293
Leesa Finley
RED Properties - Wake Forest, NC
RED Properties - Raleigh NC Real Estate

Whoa - check you out girl!  I knew there were brains to go with that beauty!  I LOVE it when you break it all down for me!  I finally Get It!

Jun 25, 2008 10:35 AM #2
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Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Eleanor - Look at you, very nice!  I like the 'old rules' ... they tend to be wise.  Very nice job here, I believe Lenn will be proud.

Jun 25, 2008 10:50 AM #3
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Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

I think that every buyer has two numbers.  One of them, which is probably like your rule of thumb, is what they feel comfortable buying.  The other is what the lender is willing to give them, and that's a whole lot more.  I think your rule of thumb is right up there with the Golden Rule when it comes to a buyer making his or her life comfortable.

Jun 26, 2008 02:20 AM #4
Rainer
84,353
Joe Adams
Major Mortgage USA/Branch Manager - Montrose, CO

Me thinks you are a WINNER... great job,  Now how do I top you....... 

Jun 26, 2008 01:19 PM #5
Rainmaker
1,317,551
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Hey - congratulations on Lenn's challenge -- nicely done.

Jul 01, 2008 02:51 PM #6
Rainer
179,681
Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

In their book, "The Millionaire Next Door," the authors argue that 2x income is the proper ratio for insuring enough separate funds to invest and build wealth.  Just a guess, but if people adhered to either the 2 or 3 times limit, we probably wouldn't be in this mess.  Congratulations on the challenge.

Jul 02, 2008 06:05 AM #7
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Eleanor Thorne

Equity Resources 919-649-5058
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