Tuesday, June 3, 2008

A Different Kind of Mortgage Pain

There is so much media coverage on the sub-prime mortgage mess, foreclosures, etc. I was excited to see some good advice on how to get a mortgage now.

  • FICO - Most applicants now need a score no lower than 660, and in some cases lenders are not willing to go below 720.
  • Debt to income ratio - Debt (including housing costs, car loan, student loan, alimony, credit card debt) to income ratio is now at a maximum in the mid-40s. Available credit card limits count as debt even if rarely used - which might require some credit card cancellation.
  • Documenting income - You now have to actually provide proof of income. No-doc loans, also known as liar loans, are generally not available any more.
  • Cash-money - You need to have some liquid cash available, equal to 3 - 36 months of mortgage payments.

Even good customers, with high income and years of on-time mortgage payment history are finding it more difficult to move onto a bigger/more expensive home.

Val Kleyman, a self-employed lawyer from Staten Island, knows this firsthand. He bought a two-bedroom town house three years ago; his wife then had their first child and wanted to move on to a bigger place in the same borough. He had put down 20 percent on the town house and made payments on his adjustable-rate mortgage diligently on the first of each month. Mr. Kleyman would seem to be the perfect customer for another mortgage from his same lender. “I called the bank, saying I wanted a mortgage for a bigger house,” he said. “They said: ‘That’s very nice. You always pay on time, but we can’t give you a mortgage.’ ” Actually, the bank would give him a mortgage, but only with a 25 percent down payment. As he had with the town house, Mr. Kleyman wanted to give his lender a stated income — with no supporting documentation — rather than a verifiable income. He plans to hold onto his first house and rent it out, and that would count as debt against him. He is also self-employed.

Holding on to a prior property as investment rental is something we did when we bought our current house. Most mortgage companies/banks will consider rental income as part of your income after a year or so of established rental history. As a result, even if you plan to rent out a property to cover your monthly carrying costs, the bank won't count that rental income until its well established.

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