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QUALIFYING FOR A REAL ESTATE LOAN

Earl L. Huse, JD
July 05, 2008
One of the seemingly difficult task of obtaining a real estate loan is determining if the borrower is qualified for a specific type of loan or not and understanding what debt ratio´s are in relationship to income and debts.

Debt ratio´s are an expression that represents a lenders guideline with respect to a percentage of gross income allowed for monthly Principal, Interest, Taxes and Insurance (Home Owners Insurance dues, if applicable) called PITI and is referred to in the lending industry as the "FRONT END" debt ratio.

As an example, if the monthly PITI on a $100,000 loan was $910.00 and the borrowers combined monthly gross income is $3,500.00, and then the $910.00 divided by income of $3,500.00 would equal 26%. (26% of gross income would be the maximum allowable for a conventional loan greater then 80% loan-to-value and is the "Front-end-Debt ratio).

Another way of expressing the debt ratio (Front-end-ratio) would be using the borrower´s combined total monthly gross income (as an example $3,500.00) and multiply the income by the front-end debt ratio factor. $3,500.00 times 26% equals $910.00 or the maximum PITI allowable for a conventional loan greater than 80% loan-to value.

Depending on the various type of loan programs a lender offers (Conforming, Non-Conforming, FHA or VA), debt ratio´s can go higher (again, there are loan programs available through most lenders that do not require debt ratio. They are referred to as No-Ratio loans, and will have higher interest rates ((usually ARM type loan programs)) with higher fees then most other loans), and lower interest rates can increase the borrowers buying power.

The other expression that is commonly used in the lending industry is referred to as the "BACK END" debt ratios. The back-end debt ratio is a total of PITI (Home owners association fees, if applicable) and all monthly debt obligations. As an example, if the monthly PITI on a $100,000 loan was $910.00 and the borrower has credit card debts, car payments and revolving debts of $350.00 with a combined monthly gross income of $3,500.00, then the $910.00 plus $350.00 is added together for a total of $1,260.00, divided by gross monthly income of $3,500.00 equals a back-end debt ratio of 36%.

A quick shortcut would be to multiply the maximum allowable back-end debt ratio by the borrowers gross combined monthly income and subtract the maximum allowable front-end debt ratio to arrive at maximum allowable monthly debt obligations.

Example:

3,500.00 combined gross monthly income

X 36% maximum allowable for typical conventional loan

1,260.00 total allowable for PITI and monthly debt obligations

910.00 monthly PITI payment (from example above)

350.00 maximum allowable for total monthly debt obligations.

Understanding that there are many different qualifying ratio´s used by lenders (conforming, FHA, VA, Jumbo, Non-Conforming, etc.) can help you better know if you will qualify for the loan program you have selected. Debt ratio´s go up to 65% of gross income with some C-D lenders and some lenders (B-C-D lenders) do not have any debt ratios at all. These loans usually have higher interest rates, sometimes balloon notes, higher points and fees, require larger down payments (if a purchase) and lower loan-to-value in the case of a refinance.


The standard typical debt ratio´s are as follows:

FHA VA Conventional Jumbo

29/41 41 28/36 33/36

There are higher debt ratio programs for first time homebuyer (check with the lender) and can be 33/38. The above ratios are based on 80% loan-to-value or greater. Typically, when the loan-to-value is less then 80% the debt ratio can be a little higher.

The below format will assist you in pre-qualifying yourself for a real estate loan. (There are other factors involved for a lender to make a final decision as to your "APPROVAL" of a loan, such as credit worthiness, source of funds for down payment, closing costs, reserves, etc., and the appraised value of the property purchasing of refinancing).

CONVENTIONAL QUALIFYING WORKSHEET

PROPERTY VALUE $______________

DOWN PAYMENT $______________

LOAN AMOUNT $______________

BORROWER´S GROSS MONTHLY INCOME $______________

CO-BORROWER´S GROSS MONTHLY INCOME $______________

OTHER INCOME $______________

TOTAL MONTHLY GROSS INCOME $______________

BORROWER´S TOTAL MONTHLY DEBT PAYMENTS $______________

CO-BORROWER´S MONTHLY DEBT PAYMENTS $______________

TOTAL MONTHLY DEBT PAYMENTS $______________

PROPOSED INTEREST RATE____% INTEREST RATE FACTOR_______

7.00% 7.125% 7.250% 7.375% 7.500% 7.625%

15 YR .0089882 .0090583 .0091286 .0091992 .0092701 .009341

30 YR .0066530 .0067371 .0068217 .0069067 .0069921 .007077

(Simply multiply loan amount by factor selected from above to arrive at monthly Principal and Interest payment)

LOAN AMOUNT REQUESTED _______________

MONTHLY PAYMENT (FACTOR X LOAN AMOUNT) _______________

PROPERTY TAXES (1.25% X SALES PRICE/12) _______________

INSURANCE (.33X LOAN AMOUNT/12 MONTHS) _______________

PMI INSURANCE _______________

TOTAL MONTHLY PAYMENTS $______________

DEBT RATIO´S

FRONT END (TOTAL MORTGAGE PYMT/GROSS INCOME)= ________%

BACK END (TOTAL DEBTS + MTG PYMT/GROSS INCOME)= ________%

Conventional Debt Ratio´s (standard in the industry for 80% Loan to Value and above)

Front end: 28% Back end: 36%NOTE: On all ratio´s and on most programs (Conventional, VA and FHA) there are compensating factors that may allow higher ratio´s FHA Debt ratio´s Front end: 29% Back end: 41%VA: 41% (one ratio)
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Earl L. Huse, JD

Earl L. Huse is a recognized author on real estate finance and has several books to his credit including Real Estate Law and You, Making of a Professional Loan Officer, and his latest book, Pretty Place USA, For Sale By Owner. He has written and taught Department of Real Estate accredited courses on creative finance, equity share, math of finance and more. Earl has over 1000 real estate seminars to his credit, holds a B.S., J.D., and was founder of the California Orange County Real Estate Marketing Club.

Giving up ´serious´ golf, Earl Huse began his real estate career in the mid 1970's after completing various creative financing seminars and accounting courses in Northern California. While investigating creative financing investment options to meet his personal goals during the late 1960's and early 1970's, he recognized a need for educational presentations dealing with optional methods of real estate financing. Huse moved to Southern California in the early 1970's, and began attending FHA, VA, FHMA, and FHLMC processing and underwriting seminars offered by various agencies. His goal was to have a complete understanding of the real estate loan application and process, from loan generation to loan funding. This knowledge was later used to introduce the general public to the complexity/simplicity of the loan process.

Huse joined a major real estate firm in the mid 1970's, while attending law school. His main function with the real estate firm was to develop continuing education courses that would be approved and accredited in California for licensed real estate agents. He graduated up 1979 with a Juris Doctor in law.

Earl was ultimately successful in obtaining over 120 hours in Department of Real Estate continuing education seminar credits consisting of 5 courses including, Equity Share (the only Equity Share contract approved), Real Estate Law, and Mathematics of Finance.

Because of real estate acquisition opportunities due to increasing interest rates, Huse began a quest to acquire SFR's at drastically reduced prices, with favorable financing options that would benefit both the seller and himself. With the properties in hand, he devised creative financing concepts that were unique in the real estate industry. So unique, as a matter of fact, they were once called the "Earl the Pearl, the Gem of the Sea" financing concepts.

Because of his expertise, Earl was a regular guest speaker on a local radio station that offered creative financing solutions to people calling in with questions. This soon led to a local TV show following the same format.

As a result of the high demand for his services, he developed financial seminars designed to educate the consumer.

Increasing interest rates and foreclosures through out the U.S. in the early 1980's led to the development of creative financing seminars that would do several things for the consumer, including:

1. Teach true ´no money down´ purchase concepts.
2. Teach prospective investors how to properly qualify for loans.
3. Teach people how to understand various real estate loans, and what they are, and,
4. Understanding contracts, how to use them and why (with legal advise), and other concerns.

By popular demand Huse began a seminar trail throughout California, Oregon, Washington, Texas, and Okalahoma. He now has over 1,000 seminars to his credit.

Lending money, buying homes, and seminars soon became a way of life as well as his business, so Earl acquired his own mortgage company. The success of the company afforded him the opportunity to create a real estate marketing club, in Southern California, which offered a consortium of programs to members. Foreclosed properties were the main focus (how to buy, sell, exchange, finance, etc.) along with continuing education on creative financing options, marketing and of course, financing options with the mortgage company. The club, open to the general public, allowed agents and consumers to market their own properties and, with the assistance of Huse, structure creative financing options based on the clients individual needs.

In the late 1980's, Huse liquidated his interest in the mortgage company and marketing club, and retired from the seminar trail to begin other ventures in the mortgage-banking world.

Huse retired in 2000 to write and publish a series of books which include Learn the Secrets of Real Estate Loans; America, I Want Some Real Estate and How to Buy it; Now and Forever, Zero Mortgage Payments, and Pretty Place, U.S.A.- For Sale By Owner, which are available through his website at
www.howtohavezeromortgagepayments.net.