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I have been curious lately how far lenders will go these days to approve a mortgage. It seems like they have tightened up lending based on what I read, but I wanted to share with everyone a case where a mortgage was approved and I truley did not think it would have been or should have been. This was not for me, but someone close to me and although I tried to talk some sense into her, you know how we can be when we want something- it doesn't matter at what cost or if it is wise.


Here are the facts:


Good credit score >720

2nd home purchase, 1st home is currently a month to month rental with maybe $15k equity- rental income was not used to qualify.

Purchase price of new home $270,000

3.5% down, FHA loan

Seller paid closing costs.

DTI- 55%



This person has a good job with longeveity and makes ~$90k per year.


What gets me, is the DTI and what she had to do to get that DTI. I think a responsible underwriter would have not approved this loan, but maybe they don't see what I see and maybe in the end they just don't care.


A year ago, she took out an unsecured loan for $30k to pay off a $20k credit card that she was over the limit on. She also had another credit card that was close to being maxed out at $20k.


She paid off the 1st credit card and spent the remaining $10k of the insecured loan. She then proceeded to put another $10k on the credit card she just took a loan to pay off. So instead of reducing her debt as planned, she increased her debt by $20k.


She decided to buy this 2nd home. To qualify at a 55% back end ratio, she had to pay off her credit cards. To do this, she took out a 5 year 401k loan of $42k which is half of her 401k. She paid off $30k in credit cards and used the remaining towards her down payment etc... Her payments back to herself with be roughly $750 per month for the next 5 years which is not calculated into the DTI.


To close, she had to show proof that she closed the credit card accounts. She had already started charging on one of them (within 1 week of paying them off). When she called the credit card companies, she made sure she would be able to reopen the accounts once she closed on the house- which of course they assured her "yes", she can repopen her credit cards. She closed the accounts, provided her proof, closed on the house and has reopened her credit cards of $40k credit line.


Obviously, the underwriter could see she had an issue with credit cards, but the condition she imposed was merely for show to make it look like she had been a responsible underwriter and reduced the risk on the loan.


I have helped this person with her budget a year ago when she was drowning in debt and every bite she took was on credit. Just one month ago, she bounced a couple of checks, one of which was for $1000 for her rent! How could she get approved for an $1800 per month mortgage when she doesn't have the money to cover $1000 in rent? I know they looked at her bank statements- I thought they wanted to see that people can manage their money?


I know lenders do not look at other things such as utilities, auto insurance and gas etc... which is great for some, but they have approved a loan that will give her $600 a month left per month to pay every monthly expense that does not show up on a credit report. And when her month to month renters finally move out, she will be negative $800 every month until she rents it again. Just as her history shows, her credit cards will absorb her cost of living until she reaches the limit again- then what?


I guess with good income, a good credit score, and a 401k of $40k as reserves, you can get a mortgage with FHA up to 55%.




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I read somewhere that with the right lender FHA DTI can go up to almost 60%. Her scores would indicate that, despite her spending habits and budget woes, she's been able to maintain her credit somehow. The bounced check may not have come into play, esp with overdraft protection and/or if it happened after her statements were provided. 90k in 401k is nothing to sneeze at, so I imagine she's a good saver at least and has some cash going to that every paycheck. It's possible a good chunk of the remaining balance in her 401k could be used to prevent foreclosure, and at $1800/mo, that could get her pretty far. I don't think UW has any leverage after you close so what would you expect them to do about re-opening her accounts? It's a smart tactical maneuver imo, though scary if she keeps running them up. And chances are, if something goes awry, she would default on the rental before she would default on her primary residence. Everything is risk based.


I do get your concerns about her spending habits though. Hopefully she'll do just fine. If anything, she might get her money's worth for the exorbitant PMI she'll be paying.

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Thank you for the insight, I see your points.


I wanted her to get a house, just something with a lower mortgage that wouldn't allow herself to keep digging herself into a hole. We are our own worst enemy :) I am scared for her and I thought with all the new criteria in place, lenders would steer her in a different direction. I thought FHA at 55% was in the past. Yeah, she can always use her retirement to dig out of trouble in the future.


However, she has not contributed anything to her 401k since she was married and divorced in 2010, so she has not been able to save without her husband's influence. Husband also paid for her car, paid off her student loans, and gave her $40k for the downpayment on the 1st home. I know he has everything to do with her good credit score. Before him, she was close to BK. Of course, I don't expect an underwriter to do anything about the credit cards once she closes, but doesn't the underwriter know that particular condition is pretty much a BS condition? Most people are going to reopen those Credit Cards and the underwiter knows it. Overdraft did not cover the NSF and she had to give an up to the moment bank statement to the lender to show the flow of the 401k money etc so I am sure it (plus many others NSF's) were on there.


If this is an example of the loans that are being approved, foreclosures will keep coming.



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You'd be surprised how many people don't know you can reopen credit lines. Lending standards will be cyclical imo. But, if she's making 90k a year and makes the house payment a priority, she'll be fine. I'd be shaking in my boots if I was one of the CC issuers though. :grin:

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