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YOUR MORTGAGE : Lenders Finding More Ways to Help Buyers

October 23, 1994|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — If you don't own a home because you assume that your income, cash reserves or employment history rule you out, think again: Banks, thrift institutions and other mortgage lenders literally are rewriting their rule books to get you into a house.

Part of the reason is political pressure from Congress and the Clinton Administration to increase their "affordable" lending to first-time and moderate-income purchasers.

But equally important is the realization by lenders that there are profits to be made--safely--by reaching out to renters who don't believe they qualify for a home mortgage.

A new, national study by the Consumer Bankers Assn. provides dramatic documentation of just how eager lenders are to stretch their traditional guidelines and loan-making practices. Of 130 institutions surveyed across the country, fully 96% of those responding have cut their standard down payment requirements for moderate-income buyers. The average "affordable housing" down payment requirement: Just 4.2%, $4,200 on a $100,000 loan.

More than 93% of the lenders responding have also adopted more lenient, flexible standards for one of the most crucial ingredients in the mortgage process: The ratio of your debts to your income. Although the standard "front-end" ratio--your projected monthly housing payment compared with your monthly income--is 28%, lenders in the study averaged 33% for first-time, moderate-income purchasers.

The same sort of stretch can be seen on their "back-end" ratio requirements--that is, your total monthly debt load (mortgage plus charge accounts, car payments, student loans, etc.)--versus your monthly income. Instead of the 36% ceiling they've used in their conventional mortgage programs, lenders looking for moderate-income purchasers averaged over 39%. That means that with a $3,000-a-month income, you could have debts of $1,182 with a bank's more flexible rule compared with $1,080 under its traditional standards.

Other major areas where lenders are trying to bend over backward to work with first-time and moderate-income buyers, according to respondents in the study:

--More flexible approaches to credit histories. More than 94% of the lenders, for instance, said they now look at "alternative" measurements of credit-worthiness, such as your rent payments or utility payments. Gone are the days where first-time applicants get automatic turndowns because they don't have credit cards in their wallets or immaculate credit bureau files.

--More accommodating approaches on employment histories. Fully 79% of the lenders responding to the survey say they have liberalized their standards regarding the length of time in employment, numbers of jobs held during recent years and the like. You don't have to demonstrate that you've been in the same position--or the same field--for an extended period. You do have to convince the bank, however, that your income stream from your employment is likely to be stable, and that you're not prone to switch jobs every other month.

Symbolic of the aggressive outreach efforts by lenders to moderate-income and first-time buyers is a national "alternative qualification" program from the Federal Home Loan Mortgage Corp. (Freddie Mac). Available as of late September through at least seven of the largest-volume mortgage companies in the country, the "AQ" program is expressly designed for buyers who would be frozen out of homeownership using traditional lending guidelines.

The program assigns extra weight to your household cash flow--the money you can demonstrate is coming in--rather than focusing heavily on your household debt load. As proof of your ability to pay your monthly mortgage, lenders using AQ look at the rent payments you've been making, among other factors. If you've been regularly handing your landlord a check for $900 for the past year, for instance, the AQ approach takes that as a good indication that you can afford a mortgage payment somewhere in the same neighborhood.

Here's a hypothetical example supplied by Freddie Mac that shows how a lender would use the AQ method to size you up:

Say your gross annual income is $23,800 and you've got a good credit history. Your monthly rent and utilities payments for the last 12 months have been $992. Add to that the monthly federal and state income taxes you'll now save from mortgage interest deductions ($30) and your documented monthly savings deposit history ($25). That gives you $1,047 in potential money to make a mortgage payment.

Subtract from that your projected monthly utilities payments ($100), property taxes ($100) and hazard insurance ($15), and you come up with a maximum allowable principal and interest payment of $832 under the AQ method.

So how does that compare with traditional loan qualification standards? There's a dramatic difference. Using the long-customary 28% housing debt-to-household income ratio (excluding taxes and insurance), and you only qualify for monthly mortgage payments of $555. That means a considerably smaller maximum mortgage amount and a considerably lower-cost house.

The bottom line here for renters? Stop thinking you don't qualify to buy a house. Mortgage lenders are truly finding more ways to say yes.

Distributed by the Washington Post Writers Group.

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