Affordability vs. Qualification
Just because a mortgage loan officer (mortgage loan originator) tells you that you qualify for a loan does not mean that it is the best loan for you or that you should borrower the maximum loan amount for which you qualify.
Affordability is different for every one. Deciding how much you can comfortably afford to pay each month for housing is extremely important. Remember there are other costs to homeownership. As a homeowner you bear the burden of costs to purchase, maintain, and repair the home. You may have high medical expenses or spend money in ways a lender does not consider.
Qualifying and Debt Ratios
Lenders use debt ratios to determine if you qualify or can afford the new mortgage or home loan.
The Front End Ratio
The front-end ratio is your total housing debt dived by your gross monthly income. While the standard is 28% many lenders will allow borrower to spend up to 35% or more of their income on the housing debt or payment. The payment includes principal, interest, taxes, insurance and homeowner's association dues.
The Back End Ratio
Is calculated by taking all reoccurring debt divided by your gross monthly income. In this case all debt includes the housing debt included in your front-end ratio and all revolving and installment debt including alimony or child support. The standard here is 43% but conforming loans will go up to 50% debt ratio and some government loans up to a 55% debt ratio.
Affordable?
If you make $7,000 a month in gross income and 55% goes out on bills and 25% is taken out for taxes can you handle all the utilities, medical, food, clothing, child expense and unexpected costs on just 20% or $1,400 a month?
Remember only your really know what is affordable!
The CFPB Ability to Repay (ATR) Rule
Ability to Repay (ATR)
The Consumer Financial Protection Bureau (CFPB) issued a mandate that generally requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay a mortgage (or any consumer debt) secured by a dwelling. The final rule became effective in January 2014.
Transactions that are not covered by the ATR include an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan (such as a construction or bridge loan).
Under the ATR there are eight underwriting factors that must be considered by your mortgage lender to meet the requirements of the rule. In addition these should be verified through approved third party sources. The eight factors include the following:
1) Current or reasonably expected income or assets (other than the value of the property that secures
the loan) that the consumer will rely on to repay the loan.
2) Current employment status (if you rely on employment income when assessing the consumer’s ability to repay).
3) Projected monthly mortgage payment for this loan. You calculate this using the introductory or fully indexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal.
4) Projected monthly payment on any simultaneous loans secured by the same property.
5) Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent.
6) Debts, alimony, and child-support obligations.
7) Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income.
8) Credit history.
When lenders meet all of the requirements of the rule they are provided “safe-harbor” from borrower claims of default due to lender negligence.