Should this mortgage have been approved?

It seems that I hear the same question from my customer’s every day. The question asked the most in our current economic environment is “is there money available and are rates and cost still low”.

Money is still available to those borrowers that should be able to borrow money. It is not available to those borrowers that never really qualified but were given mortgages just a few years ago. Here is an example in the Indianapolis Star there was an article with the headline “Housing crisis has spread to well-to-do” and the article talks about a borrower in Sarasota, Florida. He bought a home for $2.5 million in 2003 and is currently behind on his $10,500 monthly payment. The article claims that he is losing his home because he lost his job at an auto-sales chain.

Let’s look at the facts. When qualifying a borrower for a mortgage the first item we look at is the income to debt ratio. The first ratio is the new mortgage payment (which includes principle, interest, taxes, insurance, and homeowner association dues) we use 26% as the guideline for this ratio. The back ratio is made up of the mortgage payment plus all other minimum debt payments. We like the back ratio to be 36%.

Let’s look at the front ratio for this Sarasota, Florida borrower. We take the $10,500 mortgage payment and divide it into gross monthly income ($250,000/12 = $20,833). The equation looks like this $10,500/$20,833 = 50.4%. This means that this person was spending over 50% of his gross income to make his mortgage payment. That ration is way too high and this borrower should have never been allowed to borrow this much money. They did not lose their home because he lost his job they lost the home because they could not afford the home on their income.

This mortgage would not be made today.

Now let’s talk about rates and closing costs. Rates have increased artificially due to the market. Freddie Mac and Fannie Mae just added a .50 adverse market condition fee which raised mortgage rates a 1/4%. Costs have not gone up at our Bank but I have seen many lenders raising closing costs. There is no reason for these increases that I can see but you should be aware of the situation.