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More homebuyers are limited in the amount they can borrow by the cash requirements than by the income requirements

Using Excess Cash to Reduce Your Expense Ratios: If you have planned to make a down payment larger than the absolute minimum, you can use the cash that would otherwise have gone to the down payment to reduce your expense ratios by paying off non-mortgage debt, or by paying points to reduce the interest rate. Just make sure that the reduced down payment does not push you into a higher mortgage insurance premium category, which would offset most of the benefit. This happens when the smaller down payment brings the ratio of down payment to property value into a higher insurance premium category. These categories are 5 to 9.99%, 10 to % and 15 to %. For example, a reduction in down payment from 9% to 6% wouldn’t raise the insurance premium, but a reduction from 9% to 4 % would. See Shrewd Mortgage Borrowers Know Their PNPs.

Getting Third Parties to Contribute: Borrowers sometimes can obtain the additional cash required to reduce their expense ratios from family members, friends, and employers, but the most frequent contributors in the US are home sellers including builders. If the borrower is willing to pay the seller’s price but cannot qualify, the cost to the seller of paying the points the buyer needs to payday loans Bremen GA qualify may be less than the price reduction that would otherwise be needed to make the house saleable. See Are House Seller Contributions Kosher?

Income Is Not Necessarily Immutable: While borrowers can’t change their current income, there may be circumstances where they can change the income that the lender uses to qualify them for the loan. Lenders count only income that is expected to continue and they therefore tend to disregard overtime, bonuses and the like. They will include overtime or bonuses only if the borrower has received them for the last 2 years, and the employer states on the written verification-of-employment form that they expect the payments to continue.

Borrowers who intend to share their house with another party can also consider making that party a co-borrower. In such case, the income used in the qualification process would include that of the co-borrower. The co-borrower’s credit should be as good as that of the borrower, however, because lenders use the lower of the credit scores of co-borrowers. The co-borrower must also be on the title and reside in the house. This works best when the relationship between the borrower and the co-borrower is permanent.

Meeting Cash Requirements

They need cash for the down payment, and for settlement costs including points, other fees charged by the lender, title insurance, escrows and a variety of other charges. Settlement costs vary from one part of the country to another and to some degree from deal to deal.

FHA requires 3.5% down on the loans it insures. Fannie Mae and Freddie Mac require 5% down on most of the loans they purchase, though lenders may raise it to 10% on larger loans. On jumbo loans that are too large to be purchased by the agencies, lenders generally require 20% down, though some lenders will accept 10% if the loan is not too large.

Qualification Tool

Prospective borrowers can find out whether they will qualify, and if they can’t the reasons they can’t, by using my qualification tool. Click on «Shop For a Mortgage» in the margin.

Reducing Expense Ratios by Changing the Instrument: Before the financial crisis, expense ratios could be reduced by extending the term to 40 years, selecting an interest-only option, switching to an option ARM on which the initial payment did not cover the interest, switching to an ARM with an exceptionally low interest rate for the first 6 or 12 months, or taking a temporary buydown where cash placed in an escrow account was used to supplement the borrower’s payments in the early years of the loan. None of these options exist today.

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