Can you really afford that mortgage?

Remember all those crazy adjustable mortgage rate deals a few years ago? Good thing you weren't one of those shmucks, right? Many excited young couples leapt on to the ARM bandwagon, enticed by low rates and less money down. Now the word of the day is "foreclosure". With so many people bailing out, you just might find a good deal out there. But are you going to get in the same trap they did?

Many people try to "cheat the system" to get loans approved. I don't mean this in the illegal sense, but they fudge the numbers a little, or find a snaky broker to push something along they may not be able to afford. Keep in mind these safeguards are there for a reason. Sure, companies don't want to lose their money, but when they tell you no, they're also protecting you.

Good lending institutions employ underwriters to handle their loans.

Underwriters evaluate the risk involved with loaning you money. Essentially they tell the lender whether or not it's a good idea to lend to you. Don't take it personal, it's a very exact method to determine the amount of risk involved. Without underwriters lenders wouldn' t be able to stay in business long enough to help you.

Two institutions, FHLMC(Freddie Mac) and FNMA (Fannie Mae) set the guidelines for most lenders. Lenders sell their loans on secondary mortgage markets to these institutions, who then resell the loans to investors, insurance companies, and banks. Lenders who keep their loans, or "Portfolio Lenders" have more flexible standards, and don't neccessarily comply with Freddie or Fannie's standards. Don't stop at just one. Shop around.

They put you under the microscope to evaluate the risks involved. The first step of course is obtaining a credit report (something you should do first). So what are they really looking for?

1. Integrity - Obviously they want to know: do you pay your bills on time? Have you paid late? Have you defaulted? Chances are if you don't treat your other obligations with respect, you might not hold your word on this loan either.

2. Your Job - Your income and job stability are very important as well. Are you a seasonal worker? Are you in an industry or at a company that is circling the drain? These factors are examined, because without a job, you can't pay back your loan. Income is large consideration here. Which ties in with:

3. Debt to income ratio - Again, can you really afford this loan? Are you already over your head? They want to know. DTI is determined by comparing your income to your homeowner expenses.

4. Property value - They want to make sure you aren't buying junk property. This is what your loan is backed by, and if you bail out, they dont want to be stuck with overvalued junk. Which ties into:

5. Loan to value ratio - This is another simple formula, how much are you borrowing compared to how much the property is worth? This is why the bigger the down payment, the better your chances are of getting approved. When you minimize LTV, you improve your risk rating.

6. Savings - How much do you have saved up? Do you have any liquid assets, stocks or bonds? Lenders like to see a 4-6 month reserve, in case of emergencies. But you can get away with a 3-4 month reserve if you put down more money. A low LTV will lessen the need for a higher cash or asset reserve.

So this is what underwriters are looking for when they estimate the risk involved with loaning money to you. It's not a mysterious method, or one that discriminates you, it' s simply based on numbers, and your ability to pay, and likelyhood of sticking it out. Be honest, and don't try to make things up that might give you an edge, because you just may find that you really can't afford that loan, and you'll end up hurting in the end when you foreclose.

by Jeremy Morgan