The 28/36 Rule: How It Affects Your Mortgage Approval

Want to buy a home? If so, you should know the golden rule of mortgage lending. The 28/36 rule measures borrowers’ ability to afford their mortgages based on their households’ gross monthly income, monthly housing-related payments, and all other monthly debt payments.

The 28/36 rule states that a household should spend no more than 28% of its gross monthly income on total housing expenses, and no more than 36% on all debt, including housing-related expenses and other recurring debts.

The details of the 28% front-end ratio

Let’s start with the first half of the rule, which is that a household should spend no more than 28% of its gross monthly income on housing expenses. This is called the “front-end ratio.”

Housing expenses are generally summarized as PITI: monthly principal, interest, property taxes, and insurance payments. They also include any housing association or condo fees. The front-end ratio does not include other housing expenses like utility bills or cable TV services.

If a borrower expects to pay $1,100 in monthly principal and interest, plus $300 in property taxes and homeowners insurance payments, the PITI costs would be $1,400 per month. Thus, the household must have gross monthly income (pre-tax income) of at least $5,000 per month ($1,400 / $5,000 = 28%) to qualify on the front-end ratio.

The fine print on the 36% back-end ratio

The second half of the rule is the back-end ratio. This ratio is calculated by dividing all recurring monthly payments on the debt by a household’s gross monthly income. The back-end ratio includes all debt: PITI payments on your mortgage, any homeowners association dues or condo fees, and credit cards, car loans, student loans, and other personal loans. Where applicable, the back-end ratio also includes required monthly child support or alimony payments. A past divorce can come back to haunt a borrower when it comes time to apply for a mortgage.

There is an important detail you should know: Monthly payments are only included in the back-end ratio when they are expected to be paid for the next 10 months or more. For example, a car loan with 12 remaining monthly payments would be included, but a car loan with only nine payments remaining would not be. Paying down your other loans can be a really good way to qualify for a larger mortgage.

The borrower with $1,400 in PITI payments might also have a $200 monthly car payment and a $250 student loan payment; back-end monthly debt payments would tally to $1,850 per month. To qualify under the back-end ratio, this borrower would need to earn at least $5,139 ($1,850 / 0.36 = $5,138.88) in gross monthly income.

How to qualify for a larger mortgage

Conventional mortgage underwriting tends to have the most stringent requirements. Buying a home with an FHA (Federal Housing Administration) mortgage generally requires a household to qualify under a 31/43 rule, but this rule can be further relaxed in specific scenarios. Energy-efficient homes can qualify under an expanded 33/45 rule when financed through the FHA, which is much easier to meet than the standard 28/36 rule for conventional loans.

Although some lenders are willing to stretch on terms, these loans are riskier for the borrower and lender alike. Borrowers who can qualify under the 28/36 rule shouldn’t have much difficulty repaying their loans. Stretching too far may make it difficult for homeowners to pay their loans on time, or in full. Homeownership may be the American dream, but anyone who has lost a home to foreclosure will tell you it is an American nightmare.

There are three ways to safely increase the amount you can borrow:

Earn more: While earning more isn’t as easy as pressing a button, it will enable you to buy a more expensive home. A borrower who can reasonably expect to earn more in the near future (a nurse who will soon become a nurse practitioner, for example) might thus qualify for a larger mortgage thanks to a higher income.
Pay down debt: Paying down debt helps your back-end ratio by leaps and bounds. Debt with the highest monthly payments as a percentage of the principal balance (car loans and credit cards, for example) should be prioritized. Consider applying for a mortgage once you have fewer than 10 months of payments remaining on a car or student loan.
Make a larger down payment: How much you borrow has a greater impact on your front- and back-end ratios than how much the home costs. Waiting a year to save more will help you qualify for a larger mortgage.
Of these three methods, the best way to qualify for a mortgage on a more expensive home is to pay down your existing debt. Consider this: A borrower with a $300 monthly car payment would need to earn $833 more than a borrower who does not have a car payment in order to qualify for the exact same mortgage amount. It seems silly — $833 in pre-tax income easily covers a $300 car payment, and then some — but it’s an illustration of just how punishing the math of mortgage underwriting can be to indebted borrowers.

The bottom line: The best way to qualify for a mortgage is to follow the basics of good personal finance: Save more, spend less, and pay off your consumer debt before applying. People who do these three things should sail through the underwriting process and get a mortgage on affordable terms.

Single-family housing starts hit highest level in 10 years

WASHINGTON – March 16, 2017 – Nationwide housing starts rose 3 percent in February from an upwardly revised January reading, according to new data from the U.S. Department of Housing and Urban Development (HUD) and the Commerce Department.

Single-family production increased 6.5 percent to 872,000 units – its highest reading in nearly a decade. Meanwhile, the multifamily component fell 3.7 percent to 416,000 units.

“This month’s gain in single-family starts is consistent with rising builder confidence in the housing market,” says Granger MacDonald, chairman of the National Association of Home Builders (NAHB). “We should see single-family production continue to grow throughout the year, tempered somewhat by supply-side constraints such as access to lots and labor.”

“The growth in the single-family arena is very encouraging, but may be partly attributable to unusually warm weather conditions throughout most of the country,” said NAHB Chief Economist Robert Dietz. “The modest drop in multifamily starts is in line with our forecast, which calls for this sector to continue to stabilize in 2017.”

Regionally in February, combined single- and multifamily housing production rose 35.7 percent in the West. Starts fell by 3.8 percent in the South, 4.6 in the Midwest and 9.8 percent in the Northeast.

Future starts
A drop in multifamily permits pulled overall permit issuance down 6.2 percent in February. Multifamily permits fell 21.6 percent to 381,000 units – but single-family permits rose 3.1 percent to 832,000 units – its highest level since September 2007.

Regionally, overall permits rose 25.4 percent in the Midwest. Permits fell 10 percent in the West, 10.4 percent in the South and 22.3 percent in the Northeast.

How to Get a Mortgage After Foreclosure (Yes, It’s Possible)

If you’ve been through a foreclosure, you’ve crawled through one of the worst real estate ordeals there is. But that experience doesn’t mean homeownership has to remain forever out of reach afterward.

In fact, it’s much easier to qualify for a mortgage after a major credit event than you may think. It all depends on the circumstances of your foreclosure—and how you’ve managed your credit since.

So if you want to get back out there, here’s how to get a mortgage after foreclosure.

How long after foreclosure can I apply for a loan?

When it comes to the necessary waiting period between going through a foreclosure and applying for a new loan, every mortgage program is a bit different. But there are some general rules.

“For a conventional mortgage, a borrower who experienced foreclosure is required to wait seven years,” says Ray Rodriguez, regional sales manager at TD Bank.

On the other hand, the Federal Housing Administration and the U.S. Department of Agriculture require a three-year waiting period while the U.S. Department of Veterans Affairs requires a two-year wait.

How to speed up the process

You can reduce the waiting period for landing a new mortgage by showing that the foreclosure was the result of a significant financial hardship from which you have recovered.

So what’s considered significant? “I live to shop” definitely doesn’t count; legitimate reasons include a layoff, business failure, divorce, or major health problems.

Be prepared to provide documentation of the hardship you claim, such as proof of paid medical bills.

“You’ll need to provide an explanation letter, which should be short and focus on recovery from the event, rather than excuses for it,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”

Her sample sentence: “After my business failed, I landed a W-2 job with an excellent company doing the same thing I did before, but with a guaranteed salary and full benefits package.”

Just keep in mind that “there is no one-size-fits-all when it comes to lenders dealing with this situation,” says Rodriguez. Every lender has different requirements aside from basic guidelines set down by the FHA, VA, USDA, Fannie Mae, and Freddie Mac.

The FHA, for instance, is particular about what constitutes a significant financial hardship, says Fleming. A serious illness or the death of a wage earner may be acceptable, whereas divorce may not be. (You might have been able to work through a divorce, but not through illness or a death.)

How to rebuild your credit

For a potential borrower, a major component of landing a new mortgage is demonstrating that you have bounced back from the financial hardship that caused you to default in the past. Job one of proving that is rebuilding your credit and keeping it sparkling clean.

To boost your credit score—lenders typically like to see a score of at least 580—pay bills on time and maintain low balances on credit cards.

“Consumers should also frequently check their credit reports to ensure there are no inaccuracies that could negatively affect their chances of qualifying for a loan,” say Rodriguez.

Keep a paperwork file

Be prepared to document everything finance-related in your postforeclosure life, advises Rodriguez. That includes pay stubs, bank and brokerage statements, and tax returns. Lenders will ask for this paperwork to verify everything you put on your mortgage application as a precaution to avoid another potential foreclosure.

And save your pennies! Unless you’re using VA financing, you will probably need a larger down payment to secure a mortgage than you may have put down last time.

“Figure 10% minimum,” says Fleming. There may be exceptions, but they are rare.

What about nonprime lenders?

You can land a new loan immediately after completion of the foreclosure in most cases. But beware: It’s expensive, the fees and interest rate are higher, and usually the terms aren’t great, Fleming says. For instance, rather than a 30-year fixed loan, you may be offered only an adjustable-rate mortgage with a high margin.

How a mortgage adviser can help

Meet with an experienced mortgage adviser soon after your foreclosure so that you can begin to work on any other long-term issues that need to be addressed and fixed.

“The three legs of the qualifying stool are income, credit, and assets,” says Fleming. If one or two are weak, you’ll pay more for a loan or may not qualify. The best corrective action for a prospective home buyer depends on what leg is weakest.

Once you’ve worked on getting your credit score over a particular threshold, you may need to conserve cash if your liquid reserves are too low, or pay down your credit cards if your debt-to-income ratio is too high.

Bottom line: Your past does not predict your future when it comes to financing—in fact, a bad experience can often scare people straight.

“Many folks have rough times in their financial life, and then are excellent credit risks afterward,” says Fleming. “If you can demonstrate a willingness and ability to make payments in the future, you can get a loan to buy a home.”

Margaret Heidenry is a writer living in Brooklyn, NY. Her work has appeared in The New York Times Magazine, Vanity Fair, and Boston Magazine.

Yale’s Shiller take on the Current and Future Housing Market

June 1, 2016: The S&P/Case-Shiller Home Price Index rose 5.2% year-over-year in March. Yale University economics professor and Robert Shiller, one of the index’s creators, had a positive yet tempered reaction to the data.

“It’s kind of what I expected. Ever since 2012, that was the bottom of the market, it’s been chugging along, going up. And it’s not exciting, but it’s positive and I don’t see why it won’t continue it for a while,” Shiller told the FOX Business Network’s Connell McShane.

“Well I don’t think it’s a preoccupation the way it was in 2006-2007. Though people need a place to live, employment is growing, people bid up the price, you have to outbid somebody else to get the house. I don’t think people are so focused on the excitement of a bubble,” said Shiller, explaining his subdued reaction.

On concerns the factors in the housing market that led to the financial crisis have not been fixed, Shiller responded, “We can’t fix human psychology.”

Shiller weighed in on whether the safeguards that have been put in place are sufficient to prevent another financial crisis in the future.

“There has been a lot of regulation” Shiller continued, “All over the world countries are putting in protections. So, yeah, I suppose things are better. But I don’t know that the protections are going to be enough and someday if this keeps going on long enough we might have another collapse in the housing market.”

When pressed on when another housing market collapse might occur, Shiller replied, “Nobody knows. If anyone knew that it wouldn’t happen. There’s an element of truth to efficient markets. On the other hand, yeah there are places where it’s getting exciting.”

Credit score problems still haunt Americans.

WASHINGTON, D.C. – May 25, 2016 – The Consumer Financial Protection Bureau (CFPB) highlighted credit score problems faced by Americans in its monthly consumer complaint snapshot. According to the report, consumers continue to complain about incorrect information on their credit reports, as well as difficulty having errors resolved.

“Credit reports are the foundation of consumers’ financial lives,” says CFPB Director Richard Cordray. “Consumers continue to express their frustration about inaccurate information on their credit reports and difficulty in getting these errors fixed. We will continue to work to ensure that credit report disputes are investigated, errors are fixed and consumers are treated fairly.”

Consumer reporting companies track a person’s credit history and other information. Errors in a consumer’s file can affect everything from their eligibility to take out a mortgage to whether they’re eligible for a job. Since the CFPB began accepting credit-reporting complaints in October 2012, the Bureau has handled approximately 143,700 of them.

Credit score complaint topics

Incorrect information on credit reports: 77% of credit reporting complaints submitted to the CFPB relate to incorrect information appearing on their reports. Frequently, these complaints are about a debt collection item that has been paid but appears as an unpaid debt on the report, a debt that is not recognized by the consumer or a debt that is no longer due because it passed the point of being enforceable in court.
Difficulty disputing inaccuracies: Consumers consistently report difficulties disputing inaccuracies on their credit report, including long delays trying to speak to a representative at the consumer-reporting company that created the report or the company that furnished the information. Other consumers complained about negative customer service experiences when they were able to get through.
High-volume complaint companies: Out of all credit-reporting complaints submitted to CFPB between December 2015 and February 2016, 95 percent involved the three nationwide credit reporting companies – Equifax, Experian and Transunion, though some of the complaints focused more on the information other companies furnished to the top three credit reporting companies.
Specialty consumer reporting companies: Consumers also submitted more than 2,000 complaints regarding specialty consumer reporting companies that specialize in background and employment screening, checking account screening, rental screening and insurance screening.
CFPB says that consumer-reporting companies have been a major focus, and it has published tips and guidance for consumers who want to review their credit report and improve their score.

© 2016 Florida Realtors®

Homebuilders say major uptick coming.

May 6, 2016 – Steady job growth, low mortgage rates and pent-up demand are prompting an increase in the demand for new single-family homes, and homebuilders say they’re ready to build them.

However, builders also say they face plenty of headwinds that could subdue some construction, such as a shortage of lots and labor, and tight access to construction and development loans.

“Builders remain cautiously optimistic about market conditions,” says Robert Dietz, chief economist of the National Association of Home Builders, in a Spring Construction Forecast Webinar on Thursday. “2016 should be the first year since the Great Recession in which the growth rate for single-family production exceeds that of multifamily. And we see single-family growth accelerating in 2017 as the supply side chain mends and we can expand production.”

NAHB forecasters predict that single-family production will see a 14 percent uptick this year to 812,000 units, and then rise another 19 percent to 964,000 units in 2017.

Single-family starts will reach 64 percent of historically normal levels by the fourth quarter of this year and rise to 77 percent of normal by the end of 2017, NAHB reports. By the end of 2017, the top 20 percent of the largest states will reach at least 102 percent of normal single-family production levels compared to the bottom 20 percent, which likely will still remain below 65 percent, NAHB reports.

“Consumer surveys suggest the ultimate goal of millennials is to purchase a single-family home in the suburbs,” says Dietz. “We see growth for single-family looking ahead. The recovery continues and is dictated by demand side conditions and supply side headwinds.”

Source: National Association of Home Builders

Florida foreclosures down 38% in one year

April 12, 2016 – February 2016 National Foreclosure Report finds a 37.6 percent drop in Florida’s foreclosure inventory in just one year. Of 21 U.S. states that foreclose through the court system, the Fla. inventory decline outpaced second-place New Jersey’s by 12 percent.

Nationally, the foreclosure inventory declined by 23.9 percent when counting both judicial and non-judicial states, and completed foreclosures dropped 10 percent year-to-year.

The number of completed Florida disclosures dropped 36.6 percent year-to-year. Nationally, the decline was 19 percent. The foreclosure inventory represents the number of homes at some stage of the foreclosure process and completed foreclosures reflect the total number of homes lost to foreclosure.

As of February 2016, the national foreclosure inventory included approximately 1.1 percent of all homes with a mortgage – the lowest for any month since November 2007.

CoreLogic also reports on the number of mortgages in serious delinquency, defined as 90 days or more past due including loans in foreclosure or REO. In Florida, 5.1 percent of mortgaged homes are considered seriously delinquent, a 34.2 percent decline from one year earlier. Nationally, the number of seriously delinquent homeowners declined 19.9 percent year-to-year to hit its lowest level in eight years.

“Job creation averaged 207,000 during the first two months of 2016, and incomes grew over the past year,” says Dr. Frank Nothaft, chief economist for CoreLogic. “More income and improved household finances have helped bring serious delinquency rates down in nearly every state.” However, two energy-dependent states – North Dakota and West Virginia – have seen a price drop as a result of price declines.

“Home price gains have clearly been a driving force in building positive equity for homeowners,” says Anand Nallathambi, president and CEO of CoreLogic. “Longer term, we anticipate a better balance of supply with demand in many markets which will help sustain healthy and affordable home values into the future.”

Fla.’s Canadian homebuyers becoming big sellers

Feb. 25, 2016 – Escaping from the chilly north, Canadians always have been eager buyers of Southwest Florida vacation and retirement homes.

But now a lower loonie compared with the U.S. dollar is causing a reverse flow, heating up the sale of Canadian-owned homes in the United States, Canadian real estate agent Laura Leyser told a group of about 100 real estate agents and brokers Thursday evening at the Miromar Design Center in Estero.

With the exchange rate currently at about 73 cents for every U.S. dollar, some Canadians are deciding that a favorable exchange rate, coupled with rapidly rising home prices, are a good enough reason to give up their sunny Southwest Florida hideaways.

“Canadians see this time as an opportunity to sell,” said Leyser, who is past president of both the Canadian and Ontario real estate associations.

If Canadians start to sell in droves – perhaps also influenced by the volatility of the stock market and the future direction of home prices – it’s likely Southwest Florida’s real estate market will feel it.

Canadians make up the biggest proportion of international buyers in the Southwest Florida market, according to the Naples Area Board of Realtors. About seven out of 10 international buyers in Collier County are Canadians, NABOR said.

Leyser said Canadians traditionally have been attracted not only by the good weather but also by their perception that real estate in the region is a good investment with low property and sales taxes.

Lux amenities also are an attraction, since gated golf course communities with pools, clubhouses and tennis courts aren’t as common in Canadian cities, she said.

With average Canadian home prices up 17 percent in January from a year earlier, to $470,297, some Canadians also see Southwest Florida home prices as a bargain.

Yet while Canadians remain heavy buyers of Florida real estate – 41 percent of their purchases are in the Sunshine State – their investment is on the decline, partly due to a strengthening dollar that made U.S. homes more expensive for them, according a report by the National Association of Realtors. Nationwide, Canadian buyers were responsible for $11.2 billion in residential purchases in 2015, down from $13.8 billion in 2014, NAR reported.

Canadian buyers made up 14 percent of all international property buyers in the U.S. in 2015, NAR said.

While the volatility of the American stock market and concerns about the future direction of home prices may also put a damper on Canadian purchases in the near future, at least one perpetual worry of the real estate community is unlikely to have any effect: a future upward spike in mortgage interest rates.

Canadians can get a mortgage on a U.S. property from a Canadian bank at a lower rate than Americans can get from U.S. banks, Leyser said.

But interest rates aren’t much of an issue for Canadians anyway, since seven out of 10 buyers purchase with cash.

Copyright © 2016 the Naples Daily News (Naples, Fla.), June Fletcher. Distributed by Tribune Content Agency, LLC.

Lending disclosures delay 1 in 10 transactions

WASHINGTON – Feb. 15, 2016 – A new survey of Realtors conducted by the National Association of Realtors® (NAR) attempted to find out exactly how well the TRID rules are, and are not, working. According to Realtors, the new disclosures led to few contract cancellations – but they’ve caused a delay in about one in 10 transactions.

NAR’s TRID survey highlights

10.4% of transactions were delayed
Less than 1% of transactions were canceled
The typical transaction delay due to the new disclosures is 8.8 days
54.5% of respondents had problems getting closing documents for transactions and half found errors once they did
Realtors were less likely to have access to closing documents in delayed settlements
Most frequent closing disclosure problems: Missing concessions, incorrect names or addresses. However, Realtors also cited problems with incorrect fees, commissions and taxes
E-settlement procedures had fewer errors and faster remediation

A complete overview of survey results can be found on NAR’s website.

© 2016 Florida Realtors®