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Overcoming High Housing/Debt Ratios (Not Enough Income to Qualify)

Your ability to repay your mortgage is demonstrated by your housing and debt ratios, each of which is defined by the lender (see Chapter 2). If your ratios are too high, your application can be turned down. This section provides you with several solutions to the problem of high ratios.

Solution 1: Restructure Your Financing

If after prequalifying, you realize that your housing ratio and debt ratio are higher than the acceptable national standards, choose a loan type that will lower your ratios. Table 3.1 shows how Mr. and Mrs. Homebuyer (whose ratios were calculated in the sample Do- It-Yourself Prequalification Worksheet in Figure 2.3) could have lowered their ratios by choosing a different type of mortgage and lowering the starting payment rate. (Fixed payment, adjustable-rate mortgage loans, and interest-only loans are discussed in Chapter 4. Buydowns are discussed in Chapter 6.)

Buy down the interest rate. If you have the available cash, consider paying additional points (or having the seller pay additional points) to reduce the interest rate.

Obtain a temporary buydown. If you have the available cash, you can create your own buydown subsidy. The lender qualifies you on the “bought-down” rate, thus bringing your ratios within the guidelines. You also can have the seller fund your buydown, or you can obtain a “lender-funded” buydown. The lender funds the buydown by charging you a higher note interest rate to recoup the up-front expense of funding the temporary buydown (see Chapter 6). This

TABLE 3.1 Mortgage Types

Mortgage Types

is attractive if you happen to be short of funds to close and have higher debt ratios.

Increase your down payment. If you have enough available cash, increase your down payment to reduce the loan amount and bring your ratios into compliance with the guidelines (see Table 3.2). Increasing your down payment also has other benefits. Lenders prefer large down payments. Mortgages with a 5-percent down payment are ten times more likely to go into foreclosure than loans with a 20-percent down payment. With a down payment of 20 percent, most lenders allow higher housing and debt ratios. Finally, a larger down payment can save you the cost of mortgage insurance, and lower your monthly mortgage payment.

Choose a loan type with more lenient qualification ratios. FHA, VA, and nonconforming conventional loans may be easier to qualify for because of their more lenient qualification ratios (see Figure 3.2).

Provide your lender with information about additional income that may have been overlooked or disallowed.

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