Questions and Answers

Q. What is debt ratio and how do you figure it?

A. The majority of lenders will look to your income for repayment of the loan. Your debt ratio is based on gross income. We normally analyze two figures, first, housing expenditures and secondly, housing expenditures and all other monthly commitments. The critical figure is the second. A lender does not want the borrower to be overencumbered by monthly payments.

Traditionally lenders and investors have used the figure of 28% for housing and 36% for all expenditures including housing as the criteria. Today with risk model credit scoring, more aggressive investor positions and greater competition lenders are taking a bolder approach. We have seen debt ratios climbing as high as 45% or more with "A" lenders. To figure your debt ratios calculate your monthly house payment, taxes and insurance and divide by your gross monthly income.

Next add all your installment debt with fixed monthly payments, such as car, student loans etc. If you have credit card balances, estimate 5% of the balance as your monthly payment. Once you add the figures, you can now divide the total (housing and all other debts) by your gross income. Based on your credit, downpayment, savings history and current monthly expenditures a lender will make a value judgment as to how much you can afford each month.

Q. In December of 1996 I purchased a home with an adjustable rate mortgage. Is there a waiting period before I can refinance, if I want to get a fixed rate loan?

A. The best answer to this question is that you should read your note and all addenda to the note. Usually, there is no waiting period before you can refinance. At the height of the refinance boom in 1992/93, many people refinanced their homes three, four and even five times as rates came down.

However, there is one caution. If you or anyone else has a loan with a prepayment penalty, you must determine that the loan you will get is better than the loan you have and the savings is worth refinancing after you pay the prepayment penalty. If one has had credit problems in the past, many lenders offer two or three year fixed programs as well as adjustable rate loans to help get past the critical period to allow an "A" paper refinance.

The penalty for an early prepayment on these loans is usually six months interest on the unpaid balance. So before you consider a refinance of your current loan, read the note to determine that there is no prepayment penalty. If not, enjoy your savings.