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Unformatted text preview: io used by the agencies is 28%. Therefore, the borrowers' monthly payments should not exceed 28% of their gross income. Expressing it as a multiplier, we would say the borrower should earn almost four times the monthly payment. Ratios used by the agencies may change at any time because, as the cost of housing increases, borrowers allocate more of their income to housing.
13-20 Licensing School for Appraisal, CPA, Contractors, Insurance, Real Estate, Notary, Nurse, Food Handlers, Tax and Securities 13: QUALIFYING THE BORROWER
The qualifying ratio is merely a guide, and many loans are approved with higher ratios when “compensating factors” exist, serving as a buffer in case the borrowers face difficulty in meeting payments. Here are some examples of when a lender would feel justified in approving a higher loan ratio: Borrowers have a substantial cushion. If the net worth is liquid, it can be used to make the mortgage payments if necessary. Borrower has a creditworthy co borrower with additional income. Borrowers have excellent potential for higher earnings due to education or training, and current income is stable. Borrowers are making a large down payment. Borrowers have been making mortgage or rent payments at about the same level as the new loan. Example:
Borrower Jeffrey’s monthly PITI payment is $2300, and his monthly income is $6,500. Mortgage payment / Gross income = $1,500 / $6,500= 23.07% This ratio is frequently referred to as the top ratio or front–end or front–door ratio. The front–end ration should not exceed 23%.
The Jeffrey would qualify based on current income guides. Buy–down loans, graduated–payment mortgages, and adjustable rate loans require special handling. With these loans, the initial payment is lower, and then increases. The problem is, what payment do you use in qualifying the borrower? lenders' choices vary. Some use the initial payment, provided there is a reasonable expectation that the borrower's income will increase to cover the yearly increases in payments. By using the initial payment, borrowers are able to qualify for a larger loan. This i...
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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