Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 21, 1995 TAG: 9508220103
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Lenders have specific guidelines to help you know how much you can safely spend on your new home. Better yet, you can easily obtain pre-approval for a mortgage loan so that you are prepared to make a secure bid.
But don't despair if you have too little money to meet the guidelines. If your income falls within specific limits, you might qualify through a bank for special programs of affordable loans.
Michael Hincker, manager of the Roanoke office of National City Mortgage Co., said the general rule provides two methods for determining the size of the mortgage loan for which you can qualify.
The first test, he said, is that housing expenses - principal, interest, taxes and insurance - should not exceed 28 percent to 29 percent of your gross - meaning pretax - monthly income.
A second way of looking at it, Hincker said, involves a ratio of total debt to income. You add up your monthly debt obligations - payments on credit cards, auto loans, student loans, department store charge cards and the like (but not utilities or life insurance) - and put on top of it your monthly house payment. This should not exceed 38 percent of your monthly gross income.
For FHA and VA mortgages, Hincker said, the second ratio can be as high as 41 percent.
But Hincker emphasized that every borrower's case is viewed individually. Some people, for instance, might have a high debt ratio, yet also have a cushion such as mutual funds or savings. Such borrowers would warrant a second look.
And the guidelines also cover the size of the mortgage, not the value of the house. Hincker said two families might qualify to borrow $100,000, yet one might have a $70,000 down payment and the second has only $10,000. They will be looking respectively at houses worth $170,000 and $110,000.
Hincker said it is "an excellent idea" to prequalify for a loan before starting the search for a house. It proves you are "a real serious candidate" for home ownership, he said, and it sets the price range in which you will be looking.
Prequalification also provides an opportunity to settle any credit issues that might otherwise arise after an offer is made for a property.
Steve Reeves, manager of Roanoke Valley operations for First Union Mortgage Corp., agreed that prequalification "is an excellent way to approach buying a home." Having a loan in hand, he said, helps a prospective buyer negotiate with a seller, because any deal will go through without being held up.
Reeves said the standard guidelines of 28 percent of monthly gross income for the house payment and 36 percent for total debt have "stood the test of time." Virtually all lenders have relied on those ratios for many years.
But he said anyone looking for an FHA or VA mortgage should prequalify because the guidelines differ. He said the allowable debt ratio is 41 percent, but that relates to after-tax net income.
Many programs leading to home ownership are available today for people who have lower incomes, Reeves said.
First Union, for instance, offers an affordable mortgage that requires a down payment of only 5 percent. The mortgage provides 95 percent financing, and the 5 percent down payment may, under this program, be a gift from a relative.
If people qualify for this program, the bank will waive the fee for insurance that covers the loan against default.
To qualify, a family in the Roanoke Valley must have income of $31,840 a year or less. It is not limited to first-time home buyers.
Cyndi Stultz, who is in charge of the program for First Union, said either a husband or wife can qualify for the program on his or her own if the couple make too much money together.
Even if only one qualifies for the loan, however, the couple can still own the house jointly.
Qualifying singly can create problems if they have joint debt, however, because the debts will be counted.
The guideline ratios for this program are 31 percent for house payment and 38 percent for total debt.
Even though more debt is permitted under this First Union program, Reeves said, the delinquency rate is no worse than it is for conventional mortgage loan programs.
The Roanoke Redevelopment and Housing Authority began a program with local banks last spring for first-time home buyers.
Stultz said household income limits, all of which must be counted, are $22,300 for a single person, $25,450 for two people, $28,650 for three people and $31,850 for four people.
Reeves said the family must contribute half of its available cash, with a minimum of $500, toward the down payment. That means that a family with as little as $1,000 can put up $500 as the down payment.
That down payment, Reeves said, represents total out-of-pocket expenses for the loan, including all loan costs.
The bank will extend 75 percent of the mortgage, Reeves said.
The other 25 percent is put up by the Virginia Department of Housing and Community Development through the Roanoke Redevelopment and Housing Authority.
After five years of satisfactory loan payments by the buyer, Reeves said, the authority will forgive one-fourth of its 25 percent. The three-quarters of the 25 percent will carry an interest rate of just 3 percent.
For this program, Reeves said, the payment-to-income ratio is 33 percent, while the debt-to-income ratio is 45 percent.
Stultz said other housing programs are available for low-income residents. She suggested that people interested in these programs check with any branch bank or with the housing authority.
The mortgage company, she said, works through First Union branches in setting up any mortgage loan program, including conventional loans.
by CNB