What you should know about lender 'overlays,' debt ratios
You can also increase your equity in the house by paying down your loan balance, a process called "cash-in refinance." If you have money in the bank earning 1 to 2 percent, a cash-in refinance that allowed a rate-reduction refinance that would not otherwise be possible would earn a very high return. Of course, you must have the cash to invest.
Debt-to-income ratio too high
In general, underwriting guidelines set maximum ratios of total debt payments to borrower income of 41-43 percent. Debt payments include the mortgage payment, property taxes, homeowners insurance, mortgage insurance (if any), and all other debt payments that extend beyond the next six months and are not deferred for a year or longer.
This includes home equity credit lines (HELOCs) and other revolving credits, credit card debt that you don't pay off at month-end, auto loans, student loans and alimony and child support payments.
If your ratio is too high to qualify, there may be ways to reduce your debt payments. The cash-in refinance referred to above not only increases your equity in the house but it also reduces your monthly mortgage payment. Borrowers who don't have excess cash but do have a 401(k) retirement account can borrow against it and use the proceeds to pay down other debt. Loans from a 401(k) are not included in the debt ratio.
The bottom line is that a loan rejection is not necessarily final, but it is up to the borrower to do what is necessary to convert the transaction from one that does not meet underwriting requirements into one that does.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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Daily market update: Sept. 2, 2015
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