Securing a Home Loan Is Often an Exercise in Creativity

Shopping for a home loan is usually a stressful process--especially when borrowers are uncertain about having enough income to qualify.

Figuring how much a borrower can borrow isn’t an exact science; it involves some creativity and finesse.

“The biggest mistake that people make is looking for a house before looking for a loan,” said Cliff Collins, senior vice president and national director of sales at Home Savings of America. “Because they don’t know how much they can really borrow, they end up looking at homes that are either too expensive or less than they can actually afford.”

Figuring how much a borrower can actually afford involves many variables, Collins said. “It’s a balancing act.”

Generally, lenders will extend a fixed-rate mortgage to a borrower where so-called monthly PITI (principal, interest, taxes and insurance costs associated with the residence) total no more than about 28% of the borrower’s gross income. Additionally, the borrower’s total obligations for PITI and other debt--such as a car payment or student loan--shouldn’t exceed about 36% of the borrower’s gross income. With a variable-rate loan, all of a borrower’s housing and debt-related payments generally should total no more than about 36% to 40% of gross monthly income. “These guidelines aren’t carved in stone,” Collins said. “We’ll routinely go to higher debt ratios when a borrower exhibits good credit and job security.”

The four most important factors that the lender looks at, he said, are the borrower’s ability to pay, willingness to pay on time, the borrower’s equity in the transaction and the security of the underlying property as an investment.

Many borrowers don’t realize that other debt to be paid off within 10 to 12 months won’t count against them. For example, Collins said, when a borrower has only a few payments on a car, it won’t be considered at loan application time. If a borrower has 15 months to go on a loan, however, it’s often worth making a few advance payments to remove it from the mortgage lender’s consideration.

“People wait much too long to find out what they can qualify for,” said John Borkhuis, vice president and district manager at Chase Manhattan Personal Financial Services in Encino. “Very few borrowers take advantage of their ability to pre-qualify for a loan.”

Chase Manhattan allows many of its wealthy borrowers to pay more than 40% of their income to PITI since these borrowers still have enough discretionary income left over for other things. That typical borrower, Borkhuis said, has an income of about $250,000 and a loan averaging $500,000. Because of this borrower profile, he said, “we use a higher debt ratio than is typical in the lending industry.”

Borrowers at Chase Manhattan have various income sources that have to be considered differently, Borkhuis said. Self-employment and commission income are looked at carefully to see if there’s a good chance that previous performance will continue. Assessing income from stocks and bonds also gets tricky, especially if there’s an anticipated bear market.

“Prospective home buyers should check their credit report and clean up any errors or payment disputes” in advance of house hunting, said James R. Boyle, senior executive vice president at Coast Federal Bank.

Also, it’s a good idea to get pre-qualified for a period of three to six months, he said. “A lot of people don’t first check how much they can borrow, and their expectations aren’t always in line with reality.”

Boyle said Coast Federal will lend more than the usual guidelines call for in many different circumstances. “The usual 36% is just a guideline,” he said. “We can go higher with a borrower who has a really good credit record, a proven ability to accumulate savings and job stability.”

Borrowers who want to refinance their homes will also get better treatment when they’ve shown an ability to make their current payments regularly.

Borrowers who don’t have the income to qualify for a particular fixed-rate loan may be able to qualify for an adjustable-rate mortgage, said Earl Peattie, president of Mortgage News Co. in Santa Ana. Not only are lenders generally more flexible, but some will even qualify the borrower based on the low introductory rate instead of the higher adjusted rate, he said.

First-time borrowers should seek out an experienced lender or loan broker, Peattie advised. “It’s a matter of skill and experience,” he said. “The more experience you have, the more creative the lender can be.” The onetime “no-qualifier” loans that were once touted by lenders are, for the most part, gone, he noted.

Getting a credit report is a good start when searching for a home. These reports may be free if you’ve recently been turned down for credit. Otherwise, the fee is usually between $5 and $10. Credit reports can be obtained by calling one of the major credit reporting bureaus such as TRW, Trans Union or CBI/Equifax, or by contacting a lender or loan broker.

Once you’ve received a copy of one or more of these credit reports, review them carefully. In many cases, the reports contain erroneous information about someone else’s accounts. Other times, a creditor may report a payment 30 days or more late when in fact it wasn’t really late.