FHA is loosening their requirements for borrowers going a little over board with what they should be spending on their mortgage. The lenders calculate what a person should be paying using a formula called “œratios”. Currently, these ratios are around 31/43- which will be explained below. One ratio is your total monthly housing expense divided by your gross monthly income. This is called the front end ratio. The total housing expense is known as PITI (principle, interest, real estate taxes and insurance) and your gross monthly income is before tax dollars. The second ratio, known as the back end ratio, includes both your housing expense plus all other monthly payments divided by your gross monthly income. All other payments which include, car, student loans, credit cards and other items that appear on your credit card. Other monthly payments can be 401k loans and alimony. Things such as food, electric bills and money you owe your mother are not included in this ratio. The qualifying ratios have tighten up over the past few 12-24 months. Now we see a  bit of a loosening up on these ratios. Other factors are now taken into consideration to compensate for higher than average ratios. The set ratios are currently 31/43 (front end/back end)- we can now squeeze a few more with some of the following items:

1. The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage, over the past 12-24 months.
2. Minimal increase in borrower’s housing expense (10 percent or less).
3. A down payment of at least 10 percent or more. (This cannot be a gift fund.)
4. The borrower has demonstrated an ability to accumulate savings and a conservative use of credit.
5. The borrower receives documented compensation or income not used for qualifying, but directly affecting the ability to meet obligations including food stamps and similar public benefits.
6. The borrower’s previous credit history shows that the borrower has the ability to devote a greater portion of income to housing.
7. The borrower has substantial documented cash reserves (at least three months PITI) after closing.
8. The borrower has potential for salary increases as indicated by job training or education in the borrower’s profession.
9. The borrower has substantial non-taxable income (if no adjustment made previously in the ratio computations.
10. The home is being purchased as the result of relocation of the primary wage-earner and the secondary wage earner has an established history of employment, is expected to return to work, and there are reasonable prospects for securing employment in a similar occupation in the new area. Good credit and stable employment is a must for all loans still. Funny, those things did not matter much before.  So, the big question is are the banks softening up or just getting soft in the approval process- again.

Good weekend-
Dale Robyn Siegel