Mortgage lenders ease rules

Nation's Housing

March 24, 1996|By Kenneth R. Harney

WASHINGTON -- Picture this: You pull all your financial records together to apply for a new mortgage. You tote up your monthly income and stack it against your total monthly payments for debts.

Turns out that your overall debt-to-income ratio a critical factor in whether you get a home loan or not is off the charts: 60 percent of your income goes to pay regular monthly debts. Since the mortgage industry typically sets a 33 percent to 36 percent ratio as the maximum permissible for conventional loans, you figure your application is going nowhere.

But you're wrong. Your application sails through, and you walk away with a loan carrying the best-available rate in the market despite a debt ratio that's nearly twice the standard limit.

A financial fantasy? For many borrowers, yes. For a growing number of applicants, however, an important trend is taking shape. Lenders using sophisticated new automated underwriting systems are abandoning the industry's traditional, rigid adherence to debt-ratio rules, and are substituting far more flexible approaches. Rather than rejecting applicants with heavy debt loads out of hand, they are searching for offsetting factors in borrowers' profiles that will allow them to throw ratios out of the equation. The offsets can take varying shapes: A sterling debt-repayment history, for example. Or substantial cash reserves that could be tapped in a pinch. Or a large equity stake in the property to be financed.

Typically, the debt-to-income ratios that pass muster under the approach are in the upper 40 percent to 50 percent range. But at the extremes, lenders confirm that they have begun approving select home loan applicants this year who carry stratospheric ratios by historic standards 60 percent, 70 percent or beyond. One Midwest mortgage executive says her firm has funded borrowers with debt ratios above 100 percent that is, applicants whose current monthly installment-debt payments actually exceed their monthly income.

"Needless to say," said the executive, "this is not the sort of loan we could ever have made in the past."

Lenders aren't eager to shout from the rooftops about cases like this because they fear they'll raise expectations among the large numbers of debt-pressured consumers who don't have the sort of "compensating factors" necessary to qualify. But they agree that the word needs to get out to thousands of other borrowers who assume their high debt ratios make obtaining or refinancing a home loan an impossible dream. These include:

Divorced parents with monthly child-support payments.

Seniors on fixed, relatively low incomes who want to refinance their homes. Younger couples whose car payments, child care, student-loan and other regular payments throw their debt-to-income ratios into what lenders call "subprime" territory exposing them to higher rates and fees.

Dozens of lenders nationwide are now not only considering applications from consumers like these, but are virtually ignoring traditional ratio rules and closing loans on the same terms they give regular, top category applicants. For example, Linda Terrasi, first vice president of Flagstar Bank in Bloomfield Hills, Mich., says her firm's use of the "Loan Prospector" computerized underwriting system developed by mortgage giant Freddie Mac has allowed it to approve recent applications where debt ratios ranged from 50 percent to 72 percent.

The bottom line here? If you're basically a solid credit risk but happen to have high debt ratios, don't be shy. Lenders may not be as hung up about ratios in 1996 as they used to be.

Pub Date: 3/24/96

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