Super-Sized Loans, Part III: Explaining Debt Ratio

Posted by on August 27th, 2012

A common problem for both jumbo loan borrowers and investors is the debt ratio.

The wealthy (aided by their financial advisors) are extremely crafty at not showing income. When they attempt to qualify for their loan, it is common for this demographic to not understand why showing $500,000 in gross income is not enough to get a $1 million loan with 30 percent down.

It takes a savvy, experienced–and equally crafty–loan officer to tactfully explain that $468,000 in expenses and deductions means they have a bottom ratio of 248 percent. After explaining this, one would be wise to duck for cover or move the phone six inches away from the ear, since the seemingly entitled borrower will be frustrated to the point of finger pointing, epithet hurling and raising the volume several decibel levels.

The typical wealthy patron will blame the issue on a macro problem from so many bad borrowers defaulting on stated-income loans. And honestly, they should be frustrated. But because modifying their tax returns to show $200,000 in taxable income is not an option, what should the mortgage professional recommend that this borrower do?

My dad taught me to “know the answer to the question before it’s asked.” So here goes.

Currently and for the foreseeable future, the largest pool of secondary investors is Fannie Mae, Freddie Mac and Ginnie Mae; together they purchase about 90-95 percent of all loans. No overlays, fast loan sales and an unlimited appetite for loans demands a new business-to-government relationship for mortgage bankers.

Quickly replacing the secondary business-to-business model common in the halcyon days of the early 2000s, mortgage bankers today are seeking direct approval with all the government-sponsored enterprises in order to participate in the agency jumbo loan market. Having these arrows in their quiver gives loan originators better lending tools and reduced jumbo loan overlays.

So long as the warehouse lines agree, today’s GSE-approved mortgage lender is able to satisfy agency jumbo demand better than ever.

Maintaining a presence in the purchase market requires that a lender offer a full suite of products. One can’t establish quality Realtor® relationships with only half a deck of loans.

By George Adair
Area Sales Manager for Bay Equity in Santa Rosa, CA

Find Parts 1-5 here:
Part I: The Fall
Part II: Dealing with the void in the secondary
Part IV: The FHA/VA lending opportunity
Part V: Then there’s portfolio lending