Among the problems that some home sellers are having right now is the issue of potential buyers being unable to qualify for a home mortgage. Indeed, since the subprime lending crash, mortgage lenders have been tightening their standards, both in terms of required credit score and in terms of debt to income ratio. I’d like to focus on debt to income ratio today.

What is your debt to income ratio?

The debt to income ratio is a number that mortgage lenders use to determine whether you have enough room in your income to take on the debt associated with a home mortgage loan. To figure this number, your total debt payments are divided by your monthly income. Consider:

You make $54,000 a year. This means that you make $4,500 per month. If you make debt payments (credit cards, loans, etc.) of $1,200 a month, you end up with 0.2667. Multiply that by 100 to get a percentage, and your debt to income ratio is 26.67 percent. A little more than a quarter of your income each month goes to debt.

28/36 qualifying ratio

There is another measure that is used to determine whether you qualify for a home mortgage loan. It is called the 28/36 qualifying ratio. This means that your housing costs (mortgage payment and interest plus insurance and taxes) should not exceed 28 percent of your monthly income. The 36 comes in when you add your housing costs to your debt obligations. That total should not exceed 36 percent of your monthly income.

For our example above, the housing costs should not be more than $1,260 a month. And when you add those costs to debt, the total should not be more than $1,620. (You can figure these numbers yourself by taking .28 and .36 and multiplying them by your monthly income.) You can see that using a 28/36 qualifying ratio, the example above would exceed the acceptable 36 percent limit. Adding the $1,200 to the $1,260 would be $2,460, or 54.67 percent.

Mortgage lenders, in some cases, decided not to go with the 28/36 qualifying ratio and allowed up to 50 percent of monthly income in some cases. Additionally, others got around the ratio with low teaser rate ARMs and interest only loans. In our example, in order to keep the total debt plus housing to under $1,620, the “creative” solutions would result in an initial monthly mortgage payment of between $300 and $400.

Of course, the fact that borrowers couldn’t afford the big increase in payments after the initial period ended is why we have the mess we’re in.

Tags: mortgage lenders, mortgage loan blog, home mortgage loan, subprime lending,
debt to income ratio, qualify mortgage loan, credit score

It is true, of course, that the economy is forefront in nearly everyone’s mind. And recent comments by Alan Greenspan regarding a recession only heightened the awareness. And today the Federal Reserve is continuing the trend. This time releasing information about the mortgage market.

Foreclosures expected to continued through 2008

Fed chair Ben Bernanke pointed out that subprime mortgages are the source of most of the foreclosures. However, he did address the fact that prime mortgages and near prime mortgage are also experiencing difficulties in terms of foreclosure. And the foreclosures are just beginning. Bernanke expects them to continue through the end of the year. This means that the real estate market is expected to see even more inventory as the year progresses. But the question then becomes this: Who will buy these foreclosures?

Lending standards tighten and demand for home mortgage loans declines

In another report issued by the Federal Reserve, trends regarding lending standards are examined, in addition to trends in demand for home mortgage loans. The Federal Reserve is reporting that lending standards are tightening, making it harder to buy a home. Additionally, these lending standards are also tightening for commercial real estate and industrial real estate.

The tightening lending standards, as well as fears over the deterioration of the real estate market, are in turn showing up as a decrease in demand for home mortgage loans. Discouraged by lending standards, and worried about declining home values, some are deciding not to even look for homes. This is likely to do little for the real estate market and the mortgage market beyond exacerbate the problem with growing inventory.

However, if you do plan to stay in a home for a while (flipping is out for the near term), and you can pass muster on the new lending standards, it is worth your while to buy soon, while home prices are low.

Tags: subprime mortgages, mortgage lenders, home mortgage loans, mortgage loan blog,
real estate market, foreclosures, lending standards

It is true, of course, that the economy is forefront in nearly everyone’s mind. And recent comments by Alan Greenspan regarding a recession only heightened the awareness. And today the Federal Reserve is continuing the trend. This time releasing information about the mortgage market.

Foreclosures expected to continued through 2008

Fed chair Ben Bernanke pointed out that subprime mortgages are the source of most of the foreclosures. However, he did address the fact that prime mortgages and near prime mortgage are also experiencing difficulties in terms of foreclosure. And the foreclosures are just beginning. Bernanke expects them to continue through the end of the year. This means that the real estate market is expected to see even more inventory as the year progresses. But the question then becomes this: Who will buy these foreclosures?

Lending standards tighten and demand for home mortgage loans declines

In another report issued by the Federal Reserve, trends regarding lending standards are examined, in addition to trends in demand for home mortgage loans. The Federal Reserve is reporting that lending standards are tightening, making it harder to buy a home. Additionally, these lending standards are also tightening for commercial real estate and industrial real estate.

The tightening lending standards, as well as fears over the deterioration of the real estate market, are in turn showing up as a decrease in demand for home mortgage loans. Discouraged by lending standards, and worried about declining home values, some are deciding not to even look for homes. This is likely to do little for the real estate market and the mortgage market beyond exacerbate the problem with growing inventory.

However, if you do plan to stay in a home for a while (flipping is out for the near term), and you can pass muster on the new lending standards, it is worth your while to buy soon, while home prices are low.

Tags: subprime mortgages, mortgage lenders, home mortgage loans, mortgage loan blog,
real estate market, foreclosures, lending standards