Another mortgage question

[friar1610]

This is a followup to an earlier post in which I asked retired folks what sort of experience they'd had in obtaining mortgages. As I dig deeper, I come up with other questions. This one has to do with how much one can qualify for.

I understand the standard by which monthly housing costs should not exceed 28% of gross monthly income. But I'm not sure how banks apply that to variable rate and interest only loans. For example, the monthly mortgage payments for either variables or interest only will be much loert than for conventional 30 year mortgages. But there is obviously more risk (for both the lender and the borrower) with these loans. Is that reflected in a lower ratio than 28% to qualify? I could obviously take out a much larger variable or interest only loan using the 28% ratio than I could a 30 year conventional. But would a bank let me get away with that?

I'm assuming here that I would make a substantial down payment (20% - 30%) and would have sufficient assets to cover the principal although I understand banks are more interested in monthly income than they are in assets.

Thanks to anyone who can make me smarter on this.

 

[growing_older]

Can't help you much with current lending practices, but in the past when I stretched to get as large a mortgage as anyone's guidelines would allow, the bank actually encouraged me to take a variable interest loan just so that lower interest could allow me to qualify under those guidelines, when a fixed rate loan would not. Risky or not, they only cared if the calculation came out below their ratio limit at the time I applied.

 

[Meadbh]

For those in Canada, the new regulations enacted last month mean that .....

"(The 5-year posted rate is becoming the mandatory “qualification rate” for all uninsured borrowers with a variable rate or 1– to 4-year fixed term. Even if your actual rate is 2.00 per cent, you’ll have to prove your ability to pay the posted rate, which is 5.24 per cent as of today.)"

National Post, July 9, 2012

 

[friar1610]

Actually, I called one of the two CUs with which I would be interested in doing business earlier today to ask just those questions. They pre-approved me for more than I ever thought they would (for both a variable and a variable/interest only loan.) This, of course, is subject to a formal application when I really want to pull the trigger.

On one hand, it seemed that they were more liberal than the 28% rule would have indicated. On the other hand, I have had 3 or 4 mortgages (including re-fi's) with them over the years and so they know I have a good record of paying up. (I asked if they pulled my FICO in connection with the pre-approval and they said they didn't - went just on the basis of my record with them (mortgages, credit cards, savings, checking, CDs, etc.))

 

[Nords]

On one hand, it seemed that they were more liberal than the 28% rule would have indicated. On the other hand, I have had 3 or 4 mortgages (including re-fi's) with them over the years and so they know I have a good record of paying up.

I think the old 28%/36% rules are now just perceived to be "good ideas" and not requirements.

Lenders only care that they meet the FHA guidelines in order to be able to sell the loans. And if they're planning to hold onto the loans, then they don't even have to care about those.