Applying for a mortgage? Then don't get intimidated by a couple of little numbers.
Many homebuyers have the impression that these numbers, known as "ratios," set absolute limits on their borrowing capacity. Yet, even in today's financial climate, in which banks are watching loans carefully, there are ways to get around the ratios, mortgage experts say.
"There are a lot of gray areas where you can push the ratios," says Buddy Koolhof, Owings Mills branch manager for NVR Mortgage.
The first step in playing the mortgage ratio game is to clearly understand what goes into a pair of basic numbers.
The "front ratio" -- generally 28 percent -- is the supposed maximum percentage of your monthly gross income that could go toward your monthly housing payments. Those payments include your mortgage principal and interest, as well as property taxes and home insurance costs. (It also could include your mortgage insurance payment if you take a home loan that requires such insurance. And it could include any condominium fees.)
The "back ratio" -- generally 36 percent -- is the supposed maximum percentage of your monthly gross income that could go towardyour housing payment plus your other major obligations. Among the debts counted in this category are car loans, consumer installment loans, credit card debts and student loan payments. Excluded are such obligations as utility bills and life insurance premiums.
The standard pair of mortgage ratios, 28/36, is set by what is known as the secondary mortgage market. It is dominated by a couple of large quasi-federal agencies that buy so many of the home loans made in the United States that they are a powerful force in establishing standards. The thing to remember, mortgage specialists emphasize, is that these are only standards, not absolutes.
The reality is that -- like high school teachers -- some lenders are far more lenient than others. Rather than picking one who takes a rigid view of the rules, you can shop around and find another who is more open-minded.
Even with a relatively conservative lender, you often can make a case to stretch the ratios if you can increase the size of your down payment or hasten payment of other debts. You also can make a convincing case by showing a history of good credit or a responsible attitude toward budgeting.
"Remember that lenders look not just to the ability to pay but also the willingness to pay," says Paul Havemann, vice president of HSH Associates, a mortgage publishing firm.
Even if there are flaws on your credit report, you can impress many lenders by showing that you made extraordinary efforts to pay off past obligations or by showing a ledger book containing a detailed budget plan, he says.
"The guidelines in the ratios are not that black and white," says NVR Mortgage's Mr. Koolhof.
To get the maximum possible home loan -- and to avoid being turned down -- consider these pointers from the experts:
* Search out a mortgage lender with a lenient philosophy.
"Companies can have widely differing philosophies," Mr. Koolhof observes.
Some lenders are rigid in their adherence to standard ratios and flawless credit reports, thereby limiting themselves solely to what is known in the industry as "[grade] A paper." Yet, even today, with stricter federal regulation in the financial field, other lenders are still willing to stretch ratios or make loans to those with past credit problems.
"Believe it or not, there are lenders out there who specialize in helping 'B paper' borrowers," Mr. Koolhof says.
It's not hard to get a reading on a company's lending philosophy. Often, your realty agent can tell you which lenders are tough on applicants and which aren't.
Another way to learn about a lender's philosophy is with a brief phone call. Ask for a loan officer and tell him you'd like him to "run the numbers" on you -- meaning you'd like his view of your maximum borrowing capacity.
How a lender handles the income and debt figures you give him should provide clues to the company's philosophy. So will the answer to the direct question of whether it would stretch the ratios in your case.
* Be sure the lender you choose isn't counting debts that could be paid off in less than 10 months.
Suppose you're carrying a $300-a-month car loan due to be paid off in six months. Most lenders wouldn't count that in your back ratio because the industry standard is that debts scheduled to be paid off within 10 months are not included in this number.
But a very conservative lender (and there are more such lenders out there than there once were) would count the car loan anyway, limiting your borrowing ability.
* Prepay or reduce debts that are counted in your back ratio.
Suppose that your $200-a-month student loan is due to be paid off in10 months. By making a single extra payment in advance, you could get the loan into the nine-month category so that most lenders wouldn't count it against you when calculating your back ratio.
* Try to convince the lender that your income is likely to increase.
Suppose you're just emerging from medical school and aren't yet making the sort of money you expect to make after a few years of private practice. Pointing that out greatly enhances your chances of increasing your borrowing limit.
Many lenders assume that those starting out in certain professions -- including medicine, dentistry, law and accountancy -- can anticipate substantial increases in income, Mr. Koolhof says.
* Look for a "portfolio lender" as one who might stretch the ratios for you.
A few large mortgage lenders can stretch ratios because they feel less obligation to adhere to the underwriting standards set by secondary market agencies such as Fannie Mae and Freddie Mac. That's because such portfolio lenders keep many of their home loans, rather than selling them to the secondary mortgage market.
"The key to our lending philosophy is flexibility," says Thomas Briggs, a Bethesda-based official of Great Western Mortgage Corp., a portfolio lender. Great Western sticks quite rigidly to standard ratios on fixed-rate mortgages but is more lenient when a qualified borrower takes out an adjustable-rate mortgage, he says.
* Increase the down payment on the home you're purchasing.
Lenders derive a great deal of comfort from knowing that you have a significant equity stake in your home. This may convince a lender that if you default, he's likely to get back the full mortgage amount plus his costs in the foreclosure.
A substantial down payment -- usually around 20 percent -- will persuade most lenders to be flexible, says Charles Ellinger, Towson branch manager for GMAC Mortgage Corp. "The greater the down payment, the more a lender is likely to stretch the ratios."