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Posted by Jeff Strickland on January 22, 2006, 11:59 am
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> Hi all,
>
> My wife and I are looking at purchasing our first home, and I'm trying
> to figure out what we qualify for. The things that we have in our
> favor are our strong income, good credit scores (710-750 FICO), and
> pretty good history at our current employer (7 years for me, and 1 for
> her). The things that will make it tougher to qualify are lack of a
> down payment, a good amount of existing debt, and high ratios (front
> and back).
>
The lenders will toss the high and low FICO Scores, and you only need to
keep track of the middle one. Your Mortgage Rating FICO is very often much
different than your Consumer Rating that you get from Websites. I once had a
client that had crappy mortgage credit, but she went to a Website and
printed her consumer scores. She had 710+ on the Website, and sub-640 when I
ran her mortgage rating. The credit report listed all of the same debt and
payment histories, only the scores varied widely. I never got a firm answer
as to why this can be true, so I decided that Consumer Credit and Mortgage
Credit must use different rating models.
Your scores can be good, but you just don't have the income to carry the
debt load. That is a very real possibility.
> So here are my questions:
>
> 1) What is considered as income? The reason I ask is that I
> consistently earn 15% of my salary in bonuses and stock options (mostly
> bonus), and the potential is there to earn even more (up to 40%). I'd
> like to have that extra 15% factored into the income calculations, but
> I don't know the protocol on that kind of thing.
>
They will want 2 years of W2 or 1099 -- depending on how you are paid. these
documents will disclose all forms of income from the employer, and will
include the bonuses. (I am not sure if they will include the stock options,
I suspect not. The stocks are not income, per se, but can be used to show
cash reserves, so they certainly have value relative to your purchase
ability.)
> 2) What is the max amount for back and front ratios that lenders will
> accept? Even if they consider the options and bonuses as income, I
> think our ratios will be around 34/44 for interest only loans and as
> much as 40/50 for 30 year fixed loans. At least for the price range
> that we're looking at ($650K+).
>
Try looking at a 3/1 or 5/1 Interest Only mortgage to get you into the home.
These will be Fixed for 3 or 5 years, then go Adjustable. By the time the
adjustable feature comes around, you will have gained equity that will allow
you to refinance to a 30-year mortgage if you think you want that. Let me
illustrate.
If you had a 650k mortgage at 6% for 30 years, the payment would be just
under 3900. But, if you had the same mortgage on an interest only, the
payment will be only 3250. The difference is 650 per month. This assumes the
same interest rate, but the shorter term (3 or 5 years) will mean less risk
to the lender, and your reward for carrying more risk is that you get a
lower rate, this means you will get an even lower payment.
I don't know what today's rates look like, but I think that using 6% to
illustrate the point is pretty safe.
> 3) How much money will we likely need for closing costs and cash
> reserves? Also, traditional banks like Wells Fargo demand a down
> payment of 10% in addition to the closing costs. Is only paying
> closing costs with no down payment even an option, or should we plan on
> saving up for a couple of years.?
>
Yes, paying closing costs only is an available option. There are lenders
that will even finance the closing cost, and you don't have to come up with
anything out-of-pocket.
I suggest you call a mortgage broker (two or three -- the more the merrier)
to discuss your scenario. Banks only have one product line to offer,
mortgage brokers have all of the banks' products, and they have multiple
banks to get products from.
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