The Return of Wiser Lending Practices

8/13/2007, 9:56 pm

As I’ve noted before, there’s been a lot of crazy lending during the last few years. People have bought too much home and used exotic financing to do it. Ironically, this has happened during a period when the interest rates on fixed rate mortgages have been historically low. The only way this use of ARMs have made sense is if people have bought more home than they can afford with a 5.75% or 6% FRM loan. Squeaking into a home with a 1% teaser rate might feel good at first, especially if you ignore the fact that ARM is the acronym for Adjustable Rate Mortgage. And from 1%, the only direction to adjust is up.

The return to rational lending has begun. Lenders are increasing rates to account for risk. They are requiring that homeowners make a down payment and provide documentation of their income and work history. In short, we’ve come full circle. Banks and other lenders burned by bad loans are going to be careful now … as they were before mortgages could be “packaged” and sold to investors unknown to home buyers. Even the powerful magic numbers, 28 & 36, will return to lending.

Real Estate Calculator Suite was developed with a conservative lending philosophy in mind. Several have asked for an Interest Only calculator during the last few years. It wasn’t added because IO loans (from a financially conservative perspective) are risky. What Real Estate Calculator Suite has offered has been a solid, conservative collection of financial calculators for home buyers (and sellers) who wish to make wise decisions about a real estate transaction.

If you’re looking for real estate software that accommodates the magic numbers, 28 & 36, and avoids ARMS, IO and Option Pay loans, take a look at Real Estate Calculator Suite. You can download a free trial version and use it to make certain it meets your needs.

And if you’re wondering about the magic numbers I mentioned, wise borrowers tend to follow the rule that a home buyer’s PITI (principal, interest, taxes and insurance) should never exceed 28% of the borrower’s income and one’s total debt payments (home, automobiles, student loans, etc.) should never exceed 36% of your total income.

Play with the Mortgage Qualifier in Real Estate Calculator Suite to get a feel for why these numbers matter and how they influence the purchase price of a home you can afford … especially applicable now that lenders are returning to wiser lending practices.

Mortgage Qualifier in Real Estate Calculator Suite