Q: My husband and I are considering moving up to a larger home. We have three small, but rapidly growing children.
We knew when we purchased our current house that we would outgrow it, but we didn’t think it would happen so quickly!
We have the income to make higher monthly mortgage payments, but aren’t sure if we will qualify due to a high debt-to-income ratio from a combination of credit cards, auto and educational loans.
The home we are considering is twice the price of the one we currently live in, but the interest rate on our current home is higher than the current rates and my husband’s income has doubled since we bought this house three years ago.
One thing that concerns me about our qualifying for the new loan is a new auto lease. My husband’s firm decided to provide each partner with a company car that is leased to the firm. It’s actually a great deal for us, because it takes away his car payment, insurance and maintenance spending, providing us with several hundred additional dollars each month.
However, even though the firm will cover all costs associated with the new car, my husband had to cosign the lease for it. It is a luxury vehicle – something we would not have considered if it wasn’t being provided – and I’m concerned that the large amount will affect our ability to acquire a new home loan.
Do you have any insights into how we should handle our upcoming move?
A: It’s hard to look out over the next 5 to 10 years to predict what will happen to you and what kind of housing you’ll need. Sometimes we guess right, sometimes not. But when it comes to families and the stuff we all accumulate, we often outgrow homes years before we think we will.
It sounds like that’s what’s happened to you. Okay, so it’s time to trade up to a bigger home. Let’s take a look at some of the issues you’ve raised in your letter.
First, I’m confused about why your husband’s firm asked him to cosign for the car. To a mortgage lender, it will appear that your husband is responsible for the payments on the car, when in fact he isn’t paying for it. The lender may require additional information from your husband’s employer and adjust the debt ratio to compensate for the fact that the employer makes the payments on the car.
You have what is known in the mortgage industry as hidden income. Often, self-employed people, or those who own their own firms, have additional business expenses that reduce their income. But savvy mortgage lenders will take the time to go through the Schedule C, look at a profit and loss for the business, and talk with the prospective borrower about what cash is really available to make a mortgage payment.
You need to work with a highly-qualified mortgage lender who will understand your specific issue and work with you on it. Your debt-to-income ratio may not be as big a problem as you think, since there are creative financing techniques that allow lenders to work around that issue – if it even exists.
With today’s low interest rates, and your husband’s income double what it was, you may be better qualified for your next purchase than you think.
As you work with your loan officer, what you may want to do is figure out a way to pay down or off some of your credit card debt and even the school loans. If your husband’s income has doubled, you need to figure out a way to stop charging more than you earn, and pay down the higher interest-rate debt you accumulated during your leaner years.
If your school loans are at a lower interest rate than your new mortgage, you might want to keep then since some of the interest is deductible. Otherwise, you would be wise to figure out a way to roll your debt into the new mortgage, and then focus on paying off this deductible debt as quickly as possible.
Sept. 2, 2005.