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This factor can get your mortgage application denied — even if you’re a high earner

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If you need to get a mortgage to buy a house, make sure your finances are in order — especially your debt to income ratio.

Your debt-to-income ratio is all your money debt payments divided by your gross monthly income. It’s the “number one way” lenders measure your ability to manage the monthly loan repayments, per the Consumer Financial Protection Bureau.

The debt-to-income ratio was the most common reason for a denied mortgage application, at 40%, according to the 2024 Profile of Homebuyers and Sellers report by the National Association of Realtors. 

Other factors that affected homebuyers in the approval process were a low credit score (23%), unverifiable income (23%) and not enough money in reserves (12%), the report found.

The NAR polled 5,390 buyers who purchased a primary residence between July 2023 and June 2024 and found that 26% of homebuyers paid all-cash — a new high.

Lenders look for a ‘healthy’ debt-to-income ratio

Repeat buyers who gained record home equity in recent years drove that trend, according to the NAR.

But for those who need to borrow in order to buy, lenders and institutions look at your debt-to-income ratio to see if you may struggle to add a mortgage payment on top of other debt obligations.

“The higher your debt-to-income ratio is, the less chance they’re going to feel comfortable lending to you,” said Clifford Cornell, a certified financial planner and associate financial advisor at Bone Fide Wealth in New York City.

It’s a factor that affects home applicants of all income levels, said Shweta Lawande, a certified financial planner and lead advisor at Francis Financial in New York City. 

“If you’re a high earner, you might not experience an issue saving towards a down payment, but that doesn’t mean you have a healthy debt to income ratio,” she said. 

Here’s what you need to know about your debt-to-income ratio.

How to calculate your debt-to-income ratio

If you’re looking to apply for a mortgage, the first step is to know what your current DTI ratio is, said Lawande.

Take your total required monthly debt payments, like your monthly student loan or car loan payment. Divide that sum by your gross monthly income, she said. Multiply the result by 100 and you have your DTI expressed as a percentage.

A DTI ratio of 35% or less is typically considered as “good,” according to LendingTree.

But sometimes lenders can be flexible and approve applicants who have a debt-to-income ratio of 45% or higher, Brian Nevins, a sales manager at Bay Equity, a Redfin-owned mortgage lender, recently told CNBC.

A way to figure out your housing budget is the so-called 28/36 rule. That guideline holds that you should not spend more than 28% of your gross monthly income on housing expenses and no more than 36% of that total on all debts.

For example: If someone earns a gross monthly income of $6,000 and has $500 in monthly debt payments, they could afford a $1,660 a month mortgage payment if they follow the 36% rule. If the lender accepts up to 50% DTI, the borrower may be able to take up a $2,500 monthly mortgage payment.

The ‘better’ debt repayment strategy

You can improve your debt-to-income ratio by either shrinking your existing debt or growing your income.

If you have existing debt, there are two ways you can work to pay it off, experts say: the so-called “snowball method” and the “avalanche method.”

The snowball method is about paying off the smallest debt balances first no matter what the interest cost is, which can feel less overwhelming, said Shaun Williams, private wealth advisor and partner at Paragon Capital Management in Denver, the No. 38 firm on CNBC’s 2024 Financial Advisor 100 List.

“One is what’s best on a spreadsheet, and the other one is what makes someone feel best from a behavioral finance standpoint,” Williams said.

Yet, “the avalanche is better because the true cost of debt is your interest rate,” he said, as you’re more likely to pay down the debt faster.

Let’s say you have student loans with a 6% interest rate versus an existing credit card balance accruing a 20% interest rate. If you’re sitting with credit card debt, consider tackling that balance first, Cornell said.

“Whichever one’s costing you the most to borrow is the one that you want to pay down as quickly as possible,” he said.

If you’ve already done what you could to either consolidate or eliminate existing debt, focus on increasing your income and avoid other large purchases that would require financing, Lawande said.

“The goal is to just preserve the cash flow as much as possible,” she said.

Read more at CNBC

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Should You Dispute Your Property Tax Assessment?

by West + Main agent Janell Arant

The Good, the Bad, the Ugly...

In the last several years, Colorado homeowners have seen the good, the bad, and the ugly of what comes with an absurdly imbalanced seller’s market resulting from a high demand for housing with not enough inventory.

The good? We all love that part– unprecedented home equity gains, of course! The bad? Bidding wars made for either discouraged, maybe-next-year, buyers or new homeowners left feeling like they paid more than they should have but had no choice. The ugly? Well, let me tell you about the perfect storm...

Bomb Cyclone PTSD...

Picture a typical spring storm in Colorado – a little wind, a little rain turning to giant snowflakes that melt the next day, right? Maybe a few broken branches, but people are outside walking their dog and getting on with their day. Then, picture the bomb cyclone spring storm we had a few years back. It was a culmination of extreme weather conditions all joining forces, never seen before in one storm. Records were broken, businesses and schools shut down, and thousands were left stranded.

Reporting live from your mailbox...

Now picture your 2023/24 property taxes as that bomb cyclone (yes, it’s a stretch, but stay with me). In this scenario, the County Assessor’s office is the weather reporter, simply gathering the data and delivering the report to you, good or bad.

What exactly is the Assessor’s office? To keep it simple, the appraisers working for the county Assessor’s office, by law, gather sales data occurring during a select period of time, to value homes equitably so property taxes can be collected by the County Treasurer to pay for public services such as schools, roads, water, sewer, libraries, and public safety! All the things we need to run our cities well.

On May 1st the news of that that bomb cyclone is hitting homeowner’s mailboxes in the form of a little postcard known as your NOV (Notice of Value) sent by the Assessor’s office. Essentially, it’s the weather report based on the data they found, and this time it’s ugly!

The Makings of the Perfect Storm...

Just like the volatile conditions that have to come together to create the perfect storm, Colorado’s property tax conditions have all come together in the worst possible way, wreaking havoc to home owners across the state...and it all started brewing a few years ago:

- The repeal of Colorado’s Gallagher Amendment in 2020
- Rising home values at unforeseen rates between 2020 and 2022
- Peak values occurred April-June 2022** (keep this date in mind)
- Interest rates rising sharply in the summer of 2022
- The housing market cooling down because of interest rates

...add in our long-standing Colorado statutes:

- Every odd year, homes are reappraised by the county Assessor’s Office - 2023
- Residential properties are valued with the market approach, using sales occurring during the pre-designated study period
- The study period for this reappraisal = July 1, 2020 – June 30, 2022**
- All sales occurring in the study period must be time trended as if they sold on
June 30, 2022**

What does this mean for homeowners?

Essentially, it comes down to this: While unprecedented housing market conditions were great for earning equity, homeowners are now going to be paying for it in their property taxes. Without the Gallagher Amendment, which mostly benefited densely populated residential areas by keeping property taxes balanced, the protective shield is gone.

Homeowners are going to feel the pinch starting January 2024 when the increased property taxes kick in, but by how much? Denver County Assessor, Keith Erffmeyer, states, “Denver’s median increase for single family homes is 36% for this reappraisal, and even higher for mountain areas like Crested Butte.”

Tom Kammer, analyst for Douglas County’s Assessor’s office, reported an average increase of 49% for Douglas County homeowners! It’s like nothing either have seen before. Kammer warns the biggest misconception by homeowners, that may spark unnecessary property tax appeals, will be the discrepancy they see between the June 30, 2022 appraisal date value on their NOV and their home’s current value as seen on popular public websites like Zillow. He states, “The NOV is going to look high because it was when values were at it’s peak.”

Since spiking interest rates have demanded for a cooling in the housing market, the “Zestimate” homeowners see may not match up. He recommends if homeowners are using sites like Zillow, to use the Zestimate History sliding timeline graph or table view, which can both be found on the desktop version, which will show what the property’s value was as of June 2022.

County Assessors, like Erffmeyer, are working hard to educate homeowners as well as stay in front of Legislation to deliver the message that homeowners will need relief. Legislation has been presented with recent bills to help provide relief, but none have been adopted as of yet.

Next steps for homeowners...

1) Educate yourself on the home valuation process, visit your County Assessor website
2) Property tax appeal season begins May 1st and runs through June 8th, however please check your county’s policies and deadlines as they may differ.

Protesting your property value is every tax payer’s right and is easily exercised online, in person, or by mail (see your NOV for instructions).

However, as a former Douglas County residential appraiser, I recommend that you follow these guidelines when protesting:
- Have a good reason to protest
- Know your value could increase if big-ticket items are found missing
- Provide comparables in your neighborhood that look like yours of same style (don’t mix Ranch-style homes with 2-story’s, for example.): similar size, similar lot properties, similar quality.
- Only use comparables that have sold in the study period (July 1, 2020 – June 30th, 2022)
- The closer the sale is to the appraisal date of June 30, 2022, the better
3) Reach out to your Legislators
4) Talk to your trusted Realtor® for guidance, they know the market better than anyone and are here to answer all of your real estate related questions.

Look on the bright side...

To end on a positive note, Colorado has some of the lowest property taxes in the entire nation – yes, even with the bomb cyclone style conundrum we’re in! Plus, Colorado is just simply amazing to live in!

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Mortgage News: Fourth-quarter predictions and a scam alert

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The fourth quarter of 2021 is upon us (even though it still firmly feels like Q1 2020 — maybe Q2 at a stretch) and the next few months may actually feel like some kind of pre-pandemic normal.

Here’s what you need to know as the year winds down, and some other tips and tricks for what’s going on in the mortgage and real estate corner of the world.

1. Mortgage rates are likely to rise

It’s always fun to live through history, and 2021 saw the lowest mortgage rates ever. But experts said from the beginning that it wouldn’t last, and the tide should really start to roll back in this quarter. Inflation and Fed policies are likely to push mortgage rates up before the end of the year, and the trend should continue into 2022.

Read the story.

2. Actually, mortgage rates are already rising

This week saw a big jump, with mortgage 30-year mortgage rates gaining 12 basis points on average. If you haven’t already refinanced, you should really do it. There may be some fluctuation ahead, but there’s no going back to the interest sub-basement at this point.

Read the story.

3. Seasonality returns to real estate

The pandemic-era real estate market bucked just about every normal trend but this winter should see the usual transaction slowdown. Inventory and affordability issues still persist, but experts say the winter and into 2022 should be a little less frantic.

Read the story.

4. Reverse mortgage scams to watch out for

Don’t fall prey to someone trying to pull the wool over your eyes. Reverse mortgages can be a great financial tool, but there are plenty of shady dealers out there looking to take advantage of you if you have access to new funds. Here are some of the most common tricks, and other things to keep in mind before taking out a reverse mortgage.

Read the story.

5. Home equity loan or line of credit — what’s the difference?

One benefit of the crazy housing market is rising equity for current homeowners. If you’re looking to take advantage of that for yourself, the two most common options are a home equity loan and a home equity line of credit (HELOC). The best option for you depends on your situation, so it’s important to understand the difference so you can decide what you need.

Read the story

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The housing market is losing steam

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66,000 new home sales in June, down from 68,000 sales in May

Mortgage applications for new home purchases in June decreased 3% from May and 23.8% year over year, suggesting a slowdown in the housing market, according to a recent report from the Mortgage Bankers Association.

New single-family home sales were reported at a seasonally adjusted annual rate of 704,000 units in June, a decrease of 5% from May’s pace of 741,000. The MBA estimates there were 66,000 new home sales in June, down from 68,000 such sales in May.

Overall sales of new homes are still down 7% from last year, according to Joel Kan, MBA associate vice president of economic and industry forecasting.

“Last year was the strongest year in the housing market for new home sales in over a decade,” he said. “Right now, homebuilders are encountering stronger headwinds, as severe price increases for key building materials, rising regulatory costs, and labor shortages impact their ability to raise production. This has dampened new home sales and quickened home-price growth.”

Mark Palim, deputy chief economist at Fannie Mae, said anecdotal reports of builders delaying or turning down orders to clear a growing construction backlog appears to be borne out by the recent housing starts data.

“The month’s increase in single-family starts coincided with a slowdown in single-family permits, which fell 6.3 percent,” Palim said Tuesday. “While this data tends to be noisy on a month-to-month basis, the divergence between starts and permits is consistent with builders struggling to keep up with orders, as is the tick up in homes authorized but not yet started. With lumber prices recently pulling back, we expect some near-term strength in construction. However, June’s starts gain was somewhat smaller than we had anticipated while the fall in permits was greater. Therefore, a modest downward revision to our near-term forecast is likely.”

Homes for sale are still being snatched up quickly throughout the country, but a recent slowdown in bidding wars may signal some buyer fatigue in the housing market. Redfin reported recently that 65% of home offers written by company agents in June faced competition, down from a rate of 72.1% in May and a peak of 74.1% in April. New listings are also up 4% year over year, meaning more properties are hitting the housing market for buyers to bid on.

In 2018-2019, total housing market inventory was in the range between 1.52 million and 1.92 million, and that level of inventory helped to drive real home-price growth in 2019 into negative territory briefly. Existing home sales during those years stayed in the monthly sale range of 4.98 million to 5.61 million homes, according to the National Association of Realtors.

Then the COVID-19 pandemic hit, and after eight months of consecutive gains spanning 2020 and 2021, the consequences of low home inventory finally caught up with the housing market in February 2021.

Conventional mortgage loans composed 74.4% of loan applications in June, while FHA loans composed 14%. RHS/USDA loans composed 1% and VA loans composed 10.6%. The average loan size of new homes increased from $384,323 in May to $392,370 in June.

“Still-low levels of for-sale inventory are also pushing prices higher as competition for available units remains high among prospective buyers,” Kan said. “In addition to price increases, we are also seeing fewer purchase transactions in the lower price tiers as more of these potential buyers are being priced out of the market, further exerting upward pressure on loan balances.” - Housing Wire

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Eviction Uptick Likely as Moratorium Nears its End

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The clock is ticking down on the Centers for Disease Control and Prevention (CDC) eviction moratorium, spurring uncertainties about the rental housing market once it finally lifts.

Based on the U.S. Census Bureau’s Household Pulse Survey, roughly 1.2 million households report a likelihood of evictions in the next two months, while landlords are fearful they may not be able to recover from their financial woes when the dust settles.

“Property owners are going to be feeling the effects of COVID-19 far beyond the tenants, and unfortunately in some of those areas that might lead to an uptick in foreclosures, which will ultimately lead to eviction anyways,” says Kevin Sears, broker/owner of Sears Real Estate in Springfield, Massachusetts.

Sears has managed a six-unit property since the start of 2020. Prior to the pandemic in January 2020, he tried to remove a troublesome tenant, who responded by withholding rent.

Pandemic-sparked court shutdowns and freezes on evictions exacerbated the issue.

It took months after the CDC’s moratorium extension in November to evict the tenant, but by that time, they left owing roughly $12,000, plus the court costs. According to Sears, the property owner he represents also lost approximately $6,000 of rent from his other tenants who withheld rent until the problematic tenant was gone.

While the eviction ban has offered some financial relief to tenants since the outbreak of COVID-19 in 2020, mom-and-pop landlords and property owners nationwide have been shouldering the burden of 15 months without rent payments during the pandemic.

According to Sears, the recent extension of the federally-backed ban on evictions is another blow to housing providers who are already hurting or, in some cases underwater, as they try to weather the storm.

“It is delaying property owners’ day in court where they can be made whole on the rent that is owed to them,” Sears says. “I just see this latest extension as another attack or deterioration of property rights.”

A Devastating Blow

Federal officials appear to see the writing on the wall.

The issue caught the attention of U.S. District Court Judge Dabney Friedrich, who struck down the CDC’s ban on evictions in March after claiming the agency overstepped its authority.

However, the motion was stalled by an appeal filed by the U.S. Department of Justice (DOJ). The U.S. Appeals court ultimately ruled in favor of keeping the moratorium intact in June.

Later that month, five of the nine Justices voted to leave the evictions moratorium in place until July 31 following its extension. But Justice Brett M. Kavanaugh, who voted with the majority, acknowledged that the government overstepped with the ban, issuing an order saying the CDC would need congressional authority if it wanted to extend the moratorium.

The Supreme Court ruling was a letdown for industry groups pushing to get the ban lifted so landlords could start recovering in the rental housing market.

“Apartment owners and operators have continued good-faith operations throughout the COVID-19 pandemic and are still left shouldering $26.6 billion of debt not covered by federal rental assistance,” said Bob Pinnegar, president and CEO of The National Apartment Association (NAA), in a statement.

“Because the Court left the stay in place for only a few more weeks to allow continued rental assistance distribution, it is critical that those funds swiftly and efficiently flow to rental housing providers and their residents,” Pinnegar continued. “The CDC’s eviction moratorium is overreaching, damaging and unlawful, and NAA remains dedicated to fiercely advocating for the rental housing industry and housing providers throughout the nation.”

The National Association of REALTORS® (NAR) echoed similar sentiments, adding that the pandemic created a “devastating situation” for renters and housing providers nationwide.

“Today, mom-and-pop property owners—those who own four units or less—continue to look for ways to avoid evicting renters however possible, as these situations leave small housing providers without the steady rental income they need to pay their own bills and maintain their properties,” says NAR President Charlie Oppler.

NAR has pushed for the eviction moratorium to be tied to assistance so housing providers could maintain stability in the marketplace amid the rent halt. According to Oppler, NAR has also held that rental assistance funds should be paid directly to housing providers to cover bills for tenants struggling due to the pandemic.

Slow ERA Not Helping

Emergency rental assistance (ERA) was allocated to states to mitigate the financial distress for tenants and landlords. Still, the rollout has been slow in several states, straining landlords, according to Jaimie Conder, principal at Positive Results Property Management, a division of Keller Williams Realty Signature in Rockford, Illinois.

“I’ve sat down with one of our county offices to try and help them understand what we see on our end and to help them move their program along a little bit quicker,” Conder says. “The money is not coming as quickly as the owners or tenants need it.”

According to recent reports from the U.S. Treasury Department, roughly $1.5 billion in assistance for rent, overdue rent payments and utilities was distributed through May 31.

While the report noted that the assistance rollout in May showed signs of things ramping up, the amount only accounts for a fraction of the $47 billion approved by Congress as part of two ERA programs.

Reportedly, several states and local grantees hadn’t opened their programs until early June.

“I believe the funding is a good thing; I just think that it’s been done poorly,” Conder says. “At the end of the day, if landlords aren’t made whole or can’t come up with an agreement with these tenants, I think we are going to face another problem, and that’s going to be homelessness.”

Housing providers are looking for ways to avoid that outcome. Still, an uptick in eviction proceedings is likely to happen in the rental market, according to Preston Moore, a real estate agent with Howard Hanna in Gibsonia, Pennsylvania.

“If the tenant can pay, that’s fine, but if they can’t pay their rent, then they don’t pay, and the landlord—especially the mom-and-pop landlords—are the ones left holding the bag,” Moore says.

Moore, who also owns rental properties in Pittsburgh, suggests landlords haven’t had the same reprieve from financial obligations as tenants have, which has added to their challenges to survive during the pandemic.

“The problem with the small landlord is that there is no one out there to help them; therefore, they are supplementing the shortfall in rents with maybe their income or their Social Security,” Moore says. “For that tenant that is behind $20,000 in rent in California or New York, where is that person that has a basic job going to be able to generate an additional income to pay their landlord back?”

He anticipates that most tenants who are months behind on their rent won’t be able to pay their back rent, leaving many in danger of being evicted, which may also leave landlords worse for wear.

Read more articles like this on RISMedia.

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