I 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!
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!
Lenn'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