Back-end ratio on a conventional

[Anonymous]

Looking to purchase without selling my existing house.    FICO 720,  Enough for 5% down and closing costs, and about 3 months payment in reserve.     But the house we want gives us a back end ratio of 45% with my salaried income.   Most of the debt is car loans and student loans, but some credit card.      Sale of existing (800/mo total payment) would put us at 37%, but we will need to move out to do a decent job of sprucing the place up, so wanted to buy first.         Reading the forums it sounds like an FHA should be reasonable (sales price is 270K) with these numbers, but what about a conventional will they budge on the back end ratio?

[ShanetheMortgageMan]

With 20% down Fannie Mae can go up to a 50% debt ratio, and Freddie Mac up to 55%... and since there is no mortgage insurance required then those debt ratios can be approved... however mortgage insurance caps at a 45% debt ratio period, no exceptions.  Depending on your market you may even see a 41% limit on mortgage insurance guidelines.

When you said "Sale of existing (800/mo total payment) would put us at 37%, but we will need to move out to do a decent job of sprucing the place up, so wanted to buy first." does that mean you own a home currently, or are you renting?  If you own, how much is the value and how much is owed on the mortgage?  Does the $800/mo include taxes/insurance?

[Anonymous]

We own the current home with value of 110K-115K and mortgage of about 107K, so not much equity.     Yes the 800 includes taxes and insurance.  

[Anonymous]

It sounds like you want to upgrade the house prior to selling it am I correct?  Or are you looking to rent it out.

I only ask because typically, you will put more into updating the house than you will get back by an increased sales price (even more so when you remember that for every dollar you get an increase in sales price, you are paying commission and possibly closing costs on by percentage, so 1K in cost may only net you $900 and you may need to spend 2K to see that....)  It used to not be that way so much, but with the exception of fresh paint, and carpet (only if it is stained or has pet odor, etc), you will spend up to double what you get back in return.  Unless there is stuff that needs to be up to code or something to sell, you are probably better off just painting the walls a neutral color and if the carpet needs replacing, offer a carpet allowance for any buyer.  Then you can speed up the process, not put alot of money out of pocket, avoid the DTI issues as well as the multiple mortgage for a time, and be able to market the house aggressively since you will not feel the need to "make up" for the repair expenses.

One thing to note, unless you are talking about really updating a home and going for the upward moving buyer, most people would rather buy and fix to their own tastes (hence the comment about a carpet allowance verses replacing it yourself).  I do not know how many homes we looked at when we bought that had been "updated" but not in a way we really liked.  The sellers wanted to recoup their price they put into the work while we looked at the homes as fixxer uppers because maybe we did not like the colors, wallpaper, carept, etc they used.

[Anonymous]

We have lived in this house which is way too small for a little too long, it's incredibly cluttered.    The walls are nicked up with many holes, etc., we can paint that ourselves.   Both storm doors are falling off the hinges, etc.   Most of the windows have lost their seals and fog up.   (We can benefit from an energy tax credit by replacing the doors and windows, so that will help).   It's a sided house, but most of the painted trim needs done.    The deck needs multiple boards replaced and restained.    Carpet is awful as well, but we were planning on doing an allowance.    We intend to put in on the market after taking about a month to repair it.      No question in my mind and our realtors that a few thousand dollars of TLC for the really bad obvious stuff will pay off.     We could get a storage shed and move a bunch of stuff out first to sell before we buy, but we aren't really worried about being stuck with it for 6 months or more.      We just don't want the hassle of the fixing things while we are occupying the place.   

[ShanetheMortgageMan]

Another item to note with conventional if you put 5% down is that you will need 6 months PITI in reserves on both properties since there is less than 30% equity in the home you are vacating - it's a mortgage insurance guideline.  FHA does not require the reserves.  If you have a long escrow (45-60 days) on the new property you could try conventional, if you get stopped by the mortgage insurance guidelines then you'd be able to switch it to FHA.  Switching to FHA would require a new appraisal and a majority of the process to start over again however.  Since your debt ratio is borderline, for the ease of things I'd recommend FHA due to me having seen several mortgage insurance underwriters denying insurability on loans that met guidelines but were very close to not fitting, they seem to be more anal than lender underwriters.

[Anonymous]

Thanks for the helpful info on reserves in this situation.   Reading through the forum more about reserves, pretty sure I have more than I thought.  I have a Roth IRA that is plenty to cover those amounts even if there is a withdrawal penalty and it doesn't count fully.   Funny how one thing leads to another, the Roth is worth significantly less than my "basis" due to converting from an old 401K to Roth at the height of the market several years ago.    Have to check it out with my accountant, but from what I have found online, it might actually make sense to cash it in and take a deduction on the losses.     Thanks again for everyone's input.