Back To The Basics

Many people are concerned about the lending requirements and assume that banks and mortgage companies are not lending money. The truth is, they are just reverting back to the traditional lending practices of the late 90's, before the sub-prime lenders took hold and the guidelines became so loose, which is what put us in the current market predicament.

Now that we are back to a more traditional lending keel, you will most likely see the following adjustments:

1. Income: Banks may begin again to use qualifying ratios, income and debt ratios. The borrower’s income is multiplied by a percentage. The resulting number is the maximum that the bank will allow a borrower for PITI (Principal, Interest, Taxes, Insurance), a higher percentage is used for PITI plus installment debt.

Installment debt refers to monthly payments on car loans, student loans, minimum payment on credit cards, child support etc.

Gross Income X % = PITI (Principal, Interest, Taxes, Insurance)

Gross Income Y % = PITI plus installment debt.

Prior to 1997 Conventional ratios were 28% for PITI and 36% including debt. FHA and VA were 29% and 41%.

2. Money – For conventional financing, the banks require that the borrower have anywhere from five percent (5%) to 20 percent (20%) of the purchase price of their own money available and accountable. This amount will likely depend on the credit score of the buyer. Lenders require a verification of this and the money has to be "seasoned" (in the borrower’s account for at least six months). This money can not be gifted from another source.

3. Employment – Lenders required written verification that the borrower was in same profession or line of work for a minimum of two years.

4. Credit – In addition to looking the credit scores the lenders scrutinize the entire report itself. They want explanations of late payments and defaults. They do not like to see a borrower with a lot of active but unused credit cards because of the potential for over borrowing after closing.

If you have any questions, call me, Michelle Fradella, at 601-569-0075 or email me at michelle@prchomes.com.