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Mortgage applications ride on paycheck, debts

By Candice Choi

LAST UPDATED: 2:26 p.m. HST, Aug 5, 2011

NEW YORK » There's rarely been a better time to buy a house. If only you could get approved for a mortgage.

Despite the persistent uncertainty in the housing market, a steep drop in prices has made ownership a more attractive option for many. Yet some potential buyers might be sitting on the sidelines assuming they won't qualify for a loan in today's stricter lending environment. It turns out the reality isn't as stark as many believe.

It's true that lenders are looking more closely at an applicant's financial status. But that doesn't mean banks are giving mortgages only to those with sparkling credit histories and impressive assets.

Meanwhile, the reasons to jump into the market are compelling. In the spring, home prices in major cities were at the same levels reported in the summer of 2003. And the average interest rate for a 30-year fixed-rate mortgage is 4.5 percent, which remains near a four-decade low.

If you're unsure about whether you'd be approved for a mortgage, here's a look at some factors that will be considered in your application:


Don't rule yourself out just because you don't have a lot saved.

"The myth that people need 20 percent is exactly that, a myth," said Frank Codel, head of Wells Fargo's national consumer lending.

Codel said a significant portion of Wells Fargo mortgages are for down payments of 5 percent to 10 percent. Borrowers can also apply for loans from the Federal Housing Authority, which require only a 3.5 down payment.

The catch is that mortgage insurance is required when down payments are less than 20 percent. The exact cost varies. But with FHA loans, an upfront fee of 1 percent of the loan is tacked on to the mortgage. A 1.1 percent fee is also added on to the monthly payment.

So on a $200,000 loan, the upfront fee would be $2,000 and the monthly fee would be $183. Mortgage insurance on conventional loans can be cheaper, but will vary depending on your credit score. The insurance can be canceled once you reach 20 percent equity in your home.


The down payment is important, but banks are more concerned about whether borrowers will be able to keep up with mortgage payments. That means job histories are vetted carefully.

"We're looking at not only the ability to buy a home, but their ability to stay in the home," said Sanjiv Das, CEO of CitiMortgage. "That seems like a basic requirement. But it wasn't always the case in the past."

A recent period of unemployment won't automatically disqualify you; lenders are aware that the job market hasn't been kind. But banks will want to see that you're currently working and that there's strong reason to believe you'll be able to pull in a steady paycheck in the future.


Lenders want to know that you're earning enough to handle all of your bills, not just your mortgage payments.

"We want to make sure people are not overextended," Das said. "In the past, you had people who bought boats and cars and had more debt than they could handle."

So all of your debts, including credit card balances and student loans, will be weighed against your total household income.

The exact formula for what's an acceptable level varies. But at Citi, an applicant's total household debt generally can't be more than 41 percent of their income. That's including the projected mortgage payments. Other lenders may allow for more wiggle room, but the debt-to-income ratio won't be far above 45 percent in most cases.


Candice Choi can be reached at

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