Question: I completed medical school two years ago and have one more year left as a resident at a local hospital. I've decided to remain in the area and found a home I really like.
My problem is that I'm having trouble qualifying for the best financing because my resident salary is only $33,000 per year. The home is for sale for $400,000 and I plan on putting down 20 percent. Lenders don't seem to care that I'll be making over $150,000 a year from now. They will only count my resident salary. Every lender says that I have to apply for a "no income" verification loan that carries a higher rate. Do you have any suggestions?
Answer: Unfortunately, the lenders you have spoken with are correct. Even though it is virtually certain that your salary will increase dramatically in a year, lenders won't count future earnings when qualifying a mortgage applicant. Since your current salary is $33,000 per year, they will qualify you based on this number -- clearly not enough to pay for a $320,000 loan over the long term.
But before you reject a "No Income Verification" (NIV) loan, let me first explain what an NIV loan is.
Lenders approve mortgage based on three criteria: Credit history, down payment, and ability to repay the loan. An NIV loan approves a borrower based upon only credit history and down payment. Income is not examined in the underwriting process. You have good credit and a good down payment but a poor ability to repay the loan based upon your current salary. As a rule of thumb, lenders like to see a total mortgage payment not exceed 33 percent of your monthly salary. Based on your salary, you would qualify for a loan amount of only about $120,000.
An NIV loan is the answer if you pick the right product. Here's the idea: Find an adjustable rate NIV loan with no points and plan on refinancing when your income increases.
Adjustable Rate Mortgages (ARMs) carry a lower initial rate because the rate can increase in the future. Look for a one year or 3/1 ARM -- ARMs that carry a fixed rate for the first year and the first three years, respectively. These rates will be lower than a thirty year fixed rate mortgage.
Also, make sure you pay no points. This will mean you pay a little higher rate, but since you'll be paying the loan off within a year or so, it won't make sense to pay points.
When you're ready to refinance, consider no point or "no cost" programs. A good loan officer can go over the numbers and make recommendations.
Your only risk is that interest rates could jump a bit in the next year. I'm not one to predict interest rates, but it's unlikely that rates will by sky high in a year's time.
This isn't the perfect solution, but obtaining a temporary NIV loan without incurring excessive fees is better than waiting a year, throwing your money away on rent, or losing the house you really like.
For more articles by Henry Savage, please press here.
Published: September 5, 2001
Use of this article without permission is a violation of federal copyright laws.
