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Unformatted text preview: s one of the major advantages of buy–downs, graduated–payment mortgages, and adjustable rate loans. However, in some cases, lenders have tightened their standards and qualify borrowers Dynasty School (www.dynastySchool.com) 13-21 REAL ESTATE FINANCE
based only on the “fully indexed” payments, that is, the index plus the margin at time of qualifying. BACK–END RATIO
So far, we have discussed only a borrower's gross income. Lenders must also take into account the borrower's debts. Lenders break debts down into two categories, short term and long term. The short–term debts are generally ignored, and only long–term debts are considered in qualifying a borrower. How are long–term debts defined? According to the ratios in effect in 1993, the maximum amount of an applicant's income that could be spent for the payment of long–term debts was 36 percent. According to Fannie Mae/Freddie Mac, a long–term debt is any debt that extends beyond 10 months and must include the amount of the house payment as outlined above. The long–term debt must include any child support or alimony payments. Conventional lenders follow the standards of Fannie Mae, Freddie Mac, FHA, and PMI companies, which define a long–term debt as a debt that will take 10 months or longer to pay off. Alimony and child support payments are also considered long–term debts if they will continue for more than 10 months. Other non–housing consumer loans such as auto, furniture, credit card loans are generally counts towards long–term debts. Once long–term debts have been determined, the lender adds the total to the monthly payment. The two, added together, are called “total monthly expenses.” The total monthly expenses are divided by the borrower's gross income, coming up with another ratio, called the bottom ratio or back–end ratio or back–door ratio. The lender use the back–end ratio to see the borrower’s financial picture of total obligations. Conventional lenders again use FNMA and Freddie Mac current standards...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10